SS - Investing Money Annuities

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.

YearYearly
Investment
Interest
Earned
Investment Value
at the end of year
1$1,000$40.00$1,040.00
21,00081.602,121.60
31,000124.863,246.46
41,000169.864,416.32

Exercise: The power of Time

Create 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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