Question 1

What is an annuity and how does it work?

Accepted Answer

An annuity is a financial product that converts a lump sum corpus into regular periodic payments (usually monthly). You invest a corpus amount, and the annuity provider pays you a fixed monthly pension based on the annuity rate and payout period. The corpus earns interest while being gradually depleted through payouts.

Question 2

How is the monthly pension from an annuity calculated?

Accepted Answer

The monthly pension is calculated using an amortization formula: Monthly Pension = Corpus × (r × (1+r)^n) / ((1+r)^n - 1), where r is the monthly interest rate (annual rate / 12) and n is the total number of months. A higher annuity rate or shorter payout period results in a higher monthly pension.

Question 3

What is the difference between a fixed-period and lifelong annuity?

Accepted Answer

A fixed-period annuity pays out for a predetermined number of years (e.g., 15 or 20 years) and the corpus is fully depleted by the end. A lifelong annuity provides payments for life (typically modeled as 30 years), offering lower monthly payouts but guaranteed income for a longer duration.

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