85 K1.03: Installment Loans

Finance: Savings and Payout Annuities

Questions Explored

• I would like to make regular deposits into an account at regular intervals for a number of years. How much will I have in the end?
• How much do I need to deposit at regular intervals into an account in order to have a certain amount of money?
• I’d like to be able to withdraw a certain amount every year indefinitely after I retire. How much would I need to deposit at regular intervals in order to do that?

Terms

• Savings annuity—an account into which regularly scheduled deposits are made
• Payout annuity—an account with money in it where money is withdrawn regularly, eventually ending up empty

• 401(k)—one example of an employer-sponsored savings annuity
• IRA (individual retirement account) – you can open one of these and make regular deposits into the account for years
  • o There are several types of IRAs. Two examples are below. You’d talk to a financial planner about what type would be best for you based on your expected future tax bracket and the type of lifestyle you’ll lead now and in the future.
    • Traditional IRA – deposit now, pay taxes later
    • Roth IRA – pay taxes on deposits now, withdraw tax-free

For an annuity: Like compound interest, the amount in an annuity in each time period is computed on the amount of money in the annuity at the beginning of that time period. The amount present at the beginning of each period must be modified to reflect deposits or withdrawals since the previous time period began.