Why Should You Understand the Annuity Factor?

Why Should You Understand the Annuity Factor?

Investing in annuities is an easy job. All you need to do is call in the sales person and make an investment. However what would you do if you had to make an early withdrawal on the investment and wanted to know what the value of your investment was? You would not confront a difficult situation if you had spent some time studying the annuity factor. That would have helped you make an immediate assessment of your annuity yourselves, leaving you in an informed position about the current value. Let us look at the things; you should have done to understand the annuity factor.

When you make an investment in an annuity, you are doing so with the intention of earning some returns on your investment. The money you invested in the annuity has a present value, which is also known as the PV. The same investment will also have a future value, which is known as the future value. Any difference between the future value and the present value is known as a return on investment. Now if you want to determine the future value of your investment, you will have to study the annuity factor and the method used for calculating the true worth of your investment.

Assuming that you already have made the investment in the annuity, you would know for sure the present value of your annuity. You would also have in your possession the knowledge about the rate of interest applicable on the investment made and the duration of the investment. All that you have to do at this stage is use a calculator to get the future value of your annuity. Add interest at a compounded rate on the annuity for the duration of the investment. This will give you a figure that will be the future value of your annuity. Deduct the principal that you had initially invested and you get the net return on investment.

Is this applicable to all annuities? One must say that this formula cannot be applied to annuities of all types. The annuity factor formula described above is only applicable to annuities that have a fixed rate of interest. Annuities that are variable will have to be calculated using a factor that is different from the one mentioned above. These calculations need a certain amount of knowledge about the use of complicate formulas and software, which has been designed for the calculations. Variable annuities give returns that are different from fixed rate annuities. As the rate of interest is not fixed, these annuities function on conditions that exist in the market. In this case it is not possible to gauge the true value of the investment by using a handheld calculator.

Whether you have invested in fixed or variable annuities the fact that you have the present and future value on the investment cannot be ignored. If you want to know the future value of your annuity at any time, you must be in a position to calculate the same by using the annuity factor.

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