CandleFocus Glossary Editor
An ordinary annuity is a financial arrangement whereby individuals receive a fixed stream of payments over a period of time. It is considered a type of annuity because the payments are made at predetermined intervals such as yearly, quarterly, or monthly.
The payments do not necessarily need to be equal in amount - they could be larger in the first few years and then gradually reduce over the period. The benefit of using an ordinary annuity is that the payments are easy to calculate as they are consistent throughout the length of the annuity.
The most common type of ordinary annuity is the fixed annuity, in which payments and the rate of return are fixed and known in advance. It is a useful way for people to save money, as payments are made into an annuity account and invested to generate returns that are tax-deferred until the payments are taken out.
Fixed annuities are also a form of retirement savings vehicle, as payments can be made after a certain point in time, such as after retirement. They are commonly used as an annuitant's retirement income stream.
The other type of ordinary annuity is the variable annuity, in which payments are variable and are based on the performance of the underlying investments. While this type of annuity offers more potential for returns, the risk of loss is also higher.
An ordinary annuity is different from an annuity due, which is paid at the beginning of each period -- for example, if a person makes quarterly payments but starts paying them at the beginning of the period. The major difference between the two types is that you can make two payments in a year with an ordinary annuity, while you can make four payments in a year with an annuity due.
In summary, an ordinary annuity is a series of consistent payments at predetermined intervals. It is typically used to save money for retirement or other purposes, with fixed annuities providing consistent payments and variable annuities providing a potentially higher return. To compare, an annuity due is an alternative in which payments are made at the beginning of each period.
The payments do not necessarily need to be equal in amount - they could be larger in the first few years and then gradually reduce over the period. The benefit of using an ordinary annuity is that the payments are easy to calculate as they are consistent throughout the length of the annuity.
The most common type of ordinary annuity is the fixed annuity, in which payments and the rate of return are fixed and known in advance. It is a useful way for people to save money, as payments are made into an annuity account and invested to generate returns that are tax-deferred until the payments are taken out.
Fixed annuities are also a form of retirement savings vehicle, as payments can be made after a certain point in time, such as after retirement. They are commonly used as an annuitant's retirement income stream.
The other type of ordinary annuity is the variable annuity, in which payments are variable and are based on the performance of the underlying investments. While this type of annuity offers more potential for returns, the risk of loss is also higher.
An ordinary annuity is different from an annuity due, which is paid at the beginning of each period -- for example, if a person makes quarterly payments but starts paying them at the beginning of the period. The major difference between the two types is that you can make two payments in a year with an ordinary annuity, while you can make four payments in a year with an annuity due.
In summary, an ordinary annuity is a series of consistent payments at predetermined intervals. It is typically used to save money for retirement or other purposes, with fixed annuities providing consistent payments and variable annuities providing a potentially higher return. To compare, an annuity due is an alternative in which payments are made at the beginning of each period.