In previous lessons, we've explored annuities where payments begin immediately or after a short period. But what happens when there's a significant delay before the payments start? Enter deferred annuities! These unique financial instruments allow you to postpone payments, making them ideal for long-term goals like retirement planning.
Get ready to:
Define deferred annuities and understand their characteristics.
Grasp the concept of the period of deferral, the time between the initial investment and the start of annuity payments.
Calculate the period of deferral in various scenarios, using your knowledge of annuity formulas.
By the end of this lesson, you'll be well-versed in the world of deferred annuities and the power of delaying gratification to achieve your long-term financial goals. Let's unlock the potential of deferred annuities!
Scenario: Imagine you're 25 years old and planning for retirement at age 65. You want to start receiving regular payments from your retirement savings at that time.
Consider a scenario where you invest a lump sum today and another where you make regular contributions until retirement. How would the concept of a "deferred annuity" apply to these different approaches to retirement savings? Discuss the similarities and differences.
Analysis: Deconstructing Retirement Savings
How does a deferred annuity differ from the types of annuities we've discussed in previous lessons? What are the key distinguishing features?
Why might someone choose a deferred annuity over an immediate annuity? What are the potential advantages and disadvantages?
Suppose you want to receive ₱50,000 per month during retirement, starting at age 65. How would the period of deferral affect the amount you need to save or invest today?
Research different types of retirement savings plans. How do these plans incorporate the concept of deferred annuities?
This lesson introduces the concept of deferred annuities and how to calculate the period of deferral.
A deferred annuity is a type of annuity where the payments begin after a specified period, known as the period of deferral. This means you don't receive payments immediately but accumulate interest during the deferral period.
The period of deferral is the time between the purchase of the annuity and the start of the payments. It's crucial in determining the value of a deferred annuity, as a longer deferral period generally leads to higher accumulated value due to compounding.
The period of deferral can be calculated using various methods, depending on the information provided. Here are some common scenarios:
1. When the Deferral Period is Given in Years:
Simply use the given number of years as the period of deferral (k).
2. When the First Payment Date is Given:
Calculate the time difference between the focal date (usually today) and the first payment date.
Express the period of deferral (k) in the same units as the payment frequency (e.g., months, quarters, years).
3. When the Number of Deferred Payments is Given:
Divide the number of deferred payments by the payment frequency to get the period of deferral (k).
Problem: Suppose you purchase a deferred annuity today that starts paying P10,000 semi-annually in 5 years. What is the period of deferral?
Solution:
The first payment occurs in 5 years, and the payment frequency is semi-annual. Therefore:
Period of Deferral (k) = 5 years
Delay your payments and maximize returns! Here's a video lesson to understand more about deferred annuities and the period of deferral!
Time to delve into deferred annuities! This assessment focuses on your understanding of deferred annuities and the concept of the period of deferral. You'll be challenged to calculate the period of deferral in various scenarios.
Instruction: Use online resources, critical thinking, and the provided information to answer the following questions. Justify your answers with explanations and calculations. Upload your documents on this google drive link: Module 2 Lesson 6 Activity Outputs
(Note: Make sure your file name will be your Section-Year-Surname-Given_Name-Module#-Lesson#-Output#, for example: [GAS11-DelaCruz-Juan-Module1-Lesson1-Output1]. Wrong file name will subject to score deduction.)
Understanding Deferred Annuities and Period of Deferral:
Explain in your own words what a deferred annuity is and how it differs from a regular annuity.
Why might someone choose a deferred annuity over receiving immediate payments? Provide at least two real-life scenarios.
How does the period of deferral affect the future value of a deferred annuity?
Calculations:
Retirement Planning: A 35-year-old individual wants to start receiving P50,000 semi-annually for 15 years, beginning at age 60. If they purchase a deferred annuity today, what is the period of deferral in:
a) Years?
b) Semi-annual periods?
Education Fund: Parents want to create an education fund for their child who will enter college in 10 years. They plan to make quarterly deposits into a deferred annuity that will pay out P25,000 every quarter for 4 years, starting when their child turns 18.
a) What is the period of deferral in quarters?
b) If they are aiming for a specific future value for the education fund, how would the period of deferral affect their required quarterly deposits?
Critical Thinking:
Using one of the examples provided in the lesson content (e.g., monthly payments of P2,000 for 5 years starting 7 months from now), create a timeline diagram that visually represents the period of deferral and the annuity payment period.
A financial advisor presents you with two deferred annuity options:
Option A: A shorter period of deferral but lower payments once they begin.
Option B: A longer period of deferral but higher payments.
What factors should you consider when choosing between these options?
Period of deferral understood? Let's master present value calculations in Lesson 7!