What is an Annuity?An annuity is an investment that requires the investor to invest the a given amount at the beginning of each year (time period) for a specific number of years (time periods). Interest is paid at the end of each year (time period) and remain part of the investment.
Annuity Example$1,000 is invested each year for 4 years and an interest rate of 4% is paid annually.
| Year | Yearly
Investment | Interest
Earned | Investment Value
at the end of year | | 1 | $1,000 | $40.00 | $1,040.00 | | 2 | 1,000 | 81.60 | 2,121.60 | | 3 | 1,000 | 124.86 | 3,246.46 | | 4 | 1,000 | 169.86 | 4,416.32 |
Exercise: The power of TimeCreate a spreadsheet file to contain each of these Scenarios on different sheets. The shaded cells are formulas.
Scenario #1: Invest Now- assume you are 15 years old and decide to invest $1,000 at 4% for each of the next 15 years.
- After 15 years you stop investing money, but just let the investment grow until you are 65.
Scenario #2: Invest Later- assume you are 35 years old and decide to invest $1,000 at 4% until you are 65.
How did that Happen? - Which scenario has a higher value at age 65? By how much?
- How much would need to invest each year in the other scenario to have the same value at age 65?
Scenario #3: Invest Always- assume you are 15 years old and decide to invest $1,000 at 4% until you are 65.
Think about how to create this sheet with re-doing everything! - How much would need to be invested each year in the other two scenario to have the same value at age 65?
- For each scenario, how much would need to be invested each year to have $1 000 000 at age 65?
- how does the interest rate affect the ending value? increase the interest rate by 2%, what happens?
Scenario #4: TFSA- The TFSA (Tax Free Savings Account) can be opened when you are 18
- a maximum of $5,500 can be invested each year
- how much could you have saved if you start at 18? 25? 35?
- assume your return on investment is 6%
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