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How do you calculate a deferred annuity?

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Quick Answer

The future value of a deferred annuity can be calculated using a standard table that produces a factor based on time and the percentage of interest assigned. Choose the row that correlates with the number of years the annuity is to be invested, and follow it to the column that indicates its interest rate. Take the number listed where the two meet, and multiply it by the amount of money to be saved each year to yield the future value.

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Full Answer

To calculate the present value of a deferred annuity, consult the standard table that gives the value of an ordinary annuity. Add the number of years the payments are to be deferred plus the number of years the payments are to be made to determine the period to examine, and correlate this number with the correct rate of interest to produce the first factor. Find the factor that intersects with the interest rate and the last year of deferred payments. Subtract this from the first factor. Multiply the result by the amount of the annual payments to achieve the value of the deferred annuity.

Deferred annuities allow an investor to make payments into an interest-accumulating account and to receive payouts at a predetermined time by converting the deferred annuity to an ordinary annuity. Once converted, payments are taxable, but while paying in, taxes on the interest are deferred.

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