What is the difference between an ordinary annuity and an annuity due?
Explore the differences between ordinary annuities and annuities due and how the timing of payments impacts the current value, payouts, and suitability.
Ordinary annuities and annuities due vary in terms of current value and payouts.
Choosing the right annuity for individual circumstances is crucial to your financial health.
It’s best to consult with a qualified financial advisor for personalized guidance when considering annuities.
What is an annuity?
An annuity is a financial product – usually for insurance purposes – providing a series of regular payments. Annuities can be purchased individually or with the help of your employer.
It is often used as a tool for retirement planning as it offers retirees a steady income stream post-retirement.
To learn more about annuities and the different types, click here.
How does an annuity work?
In essence, an annuity is a contract between an individual and an insurance company that involves the individual making a lump sum payment or regular payments to the insurance company.
In return, the insurance company guarantees regular paybacks over a specified period, which can be set for some years or the rest of the annuitant's life.
For example, in the case of retirement, you could make a lump sum or regular payments to an insurance company offering a retirement or life annuity. Once you retire, the insurance company will then start paying you back based on your agreed terms.
Ordinary annuity vs annuity due: what are the differences?
Two main ways these annuity types differ are in their current value and the timing of payouts.
Understanding these disparities is crucial for individuals making informed decisions about their financial future.
Ordinary annuities offer fixed annuity rates at the end of each payment period, whereas annuities due disburse payments at the beginning of each period. This timing discrepancy influences the annuity's current value because of the time value of money.
Due to the time value of money, annuities due generally exhibit a higher current value than ordinary annuities.
Additionally, due to the accelerated receipt of annuity rates and the opportunity to earn more interest, the immediate impact and present worth of annuities due are more significant.
The timing of payouts also plays a pivotal role in the total payouts received from each annuity type.
Annuities due, with payments made at the beginning of each period, often yield higher total payouts than ordinary annuities.
These higher payouts are attributed to the enhanced earning potential resulting from receiving payments sooner, highlighting the impact of time on the overall financial outcome.
It’s important to weigh these differences carefully when deciding between ordinary annuities and annuities due, considering their unique financial goals and preferences.
What is the best annuity for you?
Determining the best annuity with the best annuity rates hinges on aligning the specific features of each type with an individual's financial goals and circumstances.
Ordinary annuities suit those seeking simplicity and stability in their financial planning. For instance, individuals who value a straightforward approach to income may find ordinary annuities more appealing.
On the other hand, annuities due could be more beneficial for those who prioritize maximizing their annuity rates over time. For instance, if an individual seeks higher overall earnings and is comfortable with a slightly more complex payment structure, annuities due may be a preferable choice.
Ultimately, your decision should be based on factors like risk tolerance, financial stability, and long-term objectives while ensuring the selected annuity aligns seamlessly with their unique financial profile and aspirations.
Speak to an expert about your financial future
Understanding the differences between an ordinary annuity and an annuity due is essential for effective long-term financial planning. Knowing how annuity works is also crucial for understanding your investment options and securing your financial future in a way that best suits you.
To ensure you select the best annuity, you should seek personalized advice from a financial advisor. Your financial future is unique, and consulting with an expert can help tailor annuity choices to your specific needs, ensuring a secure and well-informed retirement strategy.
For expert financial advice, let Unbiased match you with an SEC-regulated financial advisor so that you can make informed choices about your future.
Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.