An annuity calculator is a financial tool that calculates the regular payment required to be made at fixed intervals in order to receive a future lump sum amount. An annuity is a financial product that provides a series of fixed payments over a specified period of time.
The annuity calculator uses the following inputs to calculate the regular payment required:
- The lump sum amount to be received in the future (future value)
- The period over which the payments are to be made (number of payments)
- The interest rate at which the future lump sum amount will grow (interest rate per period)
The annuity calculator then uses the following formula to calculate the regular payment:
Regular payment = (Future value x interest rate per period) / (1 – (1 + interest rate per period)^(-number of payments))
For example, let’s say you want to receive a lump sum amount of $100,000 in 10 years and the interest rate is 5% per year. Using the annuity calculator, you can calculate the regular payment required to achieve this future value. Assuming the payments are made annually, the number of payments would be 10.
Using the formula:
Regular payment = (100,000 x 0.05) / (1 – (1 + 0.05)^(-10)) = $7,791.45
Therefore, a regular payment of $7,791.45 per year for 10 years at a 5% interest rate would result in a future lump sum amount of $100,000.