# Overview

#### Main Menu Name: **Annuity**

Calculates the lump sum needed at the beginning of a period of time to provide a client with payments that increase by a given percentage each year over the period. It also calculates the single payment(lump sum) immediately necessary, or the annual contribution required to meet the goal, considering the currently available capital.

### In this article:

# Background

One of the most important time value calculations available to the financial planner is the "growing annuity." Using this mathematical concept, it is possible to compute the present value of a growing annuity.

For example, your client wants to provide his wife, in the event of his death, with income possessing the purchasing power of $50,000 each year for the next 20 years. The problem is that inflation will diminish the purchasing power of a fixed annual income. Therefore, to keep purchasing power up to the $50,000 a year level, the fund must be able to generate more than $50,000. Assume that the client feels inflation will average five percent per year, and the fund itself will be able to earn an after-tax return of seven percent. How much life insurance should the client purchase today, assuming that the face amount of the policy is paid to the wife in a lump sum? The necessary face amount is $785,844.

Two other situations that call for the use of this same calculation are college funding and retirement funding. For instance, suppose a client wants to accumulate a lump sum that will pay $10,000 in the first year of college. He expects education costs will increase five percent each year for the following three years. Also, he feels whatever fund he creates can earn a net return of seven percent. The calculation indicates he needs a beginning balance of $36,348.

An example of retirement planning would be similar to the first example. If a retiring client wished to have investment income of $50,000 annually, which would increase by five percent each year for twenty years, they would need an initial capital of $785,844 earning a seven percent after-tax return.

# Why should I use this calculator?

- To determine the minimum lump sum necessary to maintain a given retirement, college education, or other income goal under a given inflation/net income scenario.
- To illustrate how to maintain purchasing power in times of inflation through increased risk or through a fund large enough that, with less risk to capital, the fund can keep pace with inflation.

# Getting Started

One of the most important time value calculations available to the financial planner is the "growing annuity." Using this mathematical concept, it is possible to compute the present value of a growing annuity.

For example, your client wants to provide his wife, in the event of his death, with income possessing the purchasing power of $50,000 each year for the next 20 years. The problem is that inflation will diminish the purchasing power of a fixed annual income. Therefore, to keep purchasing power up to the $50,000 a year level, the fund must be able to generate more than $50,000. Assume that the client feels inflation will average five percent per year, and the fund itself will be able to earn an after-tax return of seven percent. How much life insurance should the client purchase today, assuming that the face amount of the policy is paid to the wife in a lump sum? The necessary face amount is $785,844.

Two other situations that call for the use of this same calculation are college funding and retirement funding. For instance, suppose a client wants to accumulate a lump sum that will pay $10,000 in the first year of college. He expects education costs will increase five percent each year for the following three years. Also, he feels whatever fund he creates can earn a net return of seven percent. The calculation indicate she needs a beginning balance of $36,348.

An example of retirement planning would be similar to the first example. If a retiring client wished to have investment income of $50,000 annually, which would increase by five percent each year for twenty years, they would need an initial capital of $785,844 earning a seven percent after-tax return.

# Entering Data

**Initial Annual Payment Desired:**Enter the desired amount of the first annual payment.**Desired Increase in Annual Payments:**Enter the rate at which future payments from the fund should increase.**Number of Years of Payments:**Enter the number of years the payments will last.**After-tax Return on Investments:**Enter the net-after-tax rate of return on the invested capital.**Target Year for Accumulation:**Enter the target year for the accumulation.**Current Year:**Enter the starting year of the annuity.**Assumed Inflation Rate:**Enter the projected inflation rate for the allotted years of the analysis.**Capital Now Available:**Enter the investment capital currently available.

# Results

The program calculates the lump sum needed to provide annual payments that will last the given term of years. The payments from the fund will increase each year by the given growth rate.

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