1. What is a Deferred Annuity?

A deferred annuity is a financial product designed to grow your investment tax-deferred until you begin withdrawals. It's a contract with an insurance company where you invest money now to receive payments later in life.

2. How Does the Calculator Work?

The calculator uses the future value formula:

Where:

• \( FV \) — Future Value of the investment
• \( PV \) — Present Value or initial investment
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of years the money is invested

Explanation: The formula calculates compound interest growth over time, showing how your initial investment grows at a specified rate for a given period.

3. Importance of Future Value Calculation

Details: Understanding the future value helps in retirement planning by showing how much your current savings could grow over time, allowing for better financial decisions.

4. Using the Calculator

Tips: Enter your initial investment in USD, the annual interest rate as a decimal (e.g., 0.05 for 5%), and the number of years you plan to defer the annuity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between immediate and deferred annuities?
A: Immediate annuities start payments right away, while deferred annuities grow your money first and begin payments at a future date.

Q2: Are annuity earnings taxable?
A: Earnings grow tax-deferred but are taxed as ordinary income when withdrawn. Qualified annuities (funded with pre-tax dollars) are fully taxable, while non-qualified annuities (after-tax dollars) are taxed only on earnings.

Q3: What's a typical interest rate for deferred annuities?
A: Rates vary but typically range from 2% to 5% for fixed annuities. Variable annuities depend on market performance.

Q4: Are there penalties for early withdrawal?
A: Most annuities have surrender charges if you withdraw funds early (typically within 5-10 years), plus a 10% IRS penalty if withdrawn before age 59½.

Q5: How does this differ from regular compound interest?
A: The calculation is the same, but annuities often offer tax advantages and may include insurance features like death benefits or guaranteed income options.