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An annuity calculator is a computer tool, usually a spreadsheet, which is used to provide numeric solutions to specific queries about annuities, such as how much of an initial investment must be held for a certain period of time to provide a guaranteed monthly income of a certain amount. Annuity calculators are used primarily as marketing tools by the licensed insurance agents who sell annuities, and also demonstrate how annuities' value can grow over time. With the advent of computers and their potential for use in marketing financial and insurance products such as life insurance and annuities, annuity calculators have come into much more widespread use among the general public. A useful tool for potential purchasers of annuities in budgeting their investment resources and retirement income, annuity calculators shouldn't be substituted for the purchaser's own best judgment and experience.
An annuity is an insurance product. In return for a premium, usually lump-sum and usually many tens or hundreds of thousands of dollars, the insurance company promises to pay the purchaser a regular monthly income for life. Most annuity purchasers defer the income, preferring instead to let the annuity grow in value over time, taking advantage of preferential tax policy. Except for variable annuities, which can lose value, all annuities are essentially guaranteed against loss of principle, which makes them an attractive long-term savings opportunity for the risk-averse.
An annuity calculator will return a number of different values, upon being provided certain variables. The value that will always need to be provided is the purchaser's age, because annuity income payments are based on life expectancy. The other variables are the amount of the initial investment, the interest rate assumed, the length of time the annuity is allowed to grow before the monthly payments start, and the amount of those monthly payments. When provided with some of these variables, an annuity calculator will solve for the remaining variable or variables. For example, an annuity calculator could be provided with an initial investment amount, an assumed annual interest rate, the owner's current age and anticipated retirement age, and will return the value of the monthly income the annuity can be expected to provide when the owner reaches retirement age. On the other hand, the monthly income desired could be provided with most of the other variables, and the information sought would be the amount of initial investment necessary to provide that monthly income.
A good annuity calculator will take the data provided and make the projections of annuity growth that can be easily duplicated by anyone with a spreadsheet. What sets them apart is their inclusion of actuarial life expectancy data. It's relatively easy to determine how large an annuity will have grown by the time the owner reaches retirement age; it's more difficult to determine the lifetime monthly income that the annuity will reasonably fund. Good annuity calculators will also provide reliable comparisons with other similar investments, such as certificates of deposit (CDs) and savings accounts. This illustrates how the preferential tax treatment afforded to annuities gives them an advantage over other savings plans.
An investor considering purchasing an annuity can find an annuity calculator online, but can expect that most of the websites that provide them are hosted by insurance sales organizations determined to capture contact information so an agent can call. This is frustrating both to the casual researcher and to the undecided prospect. Nevertheless, online annuity calculators can help serious prospective annuity purchasers shop around and identify those companies with which they're most and least likely to do business.