[howdebdoo]

How do annuities affect TVM investment outcomes

[morgaine300]

It's not so much how an annuity affects TVM. It's just a different TVM problem. i.e. you're not going to take something that's a lump sum, and then apply an annuity to it and have it somehow change the answer. They are just two different things.

A lump sum is like if you stick money into the bank and just let it sit there accruing interest. If it's compounding, they stop and figure out the interest at the compounding date and add it on. That increases the amount. So when interest is figured the next time, you'd also be getting interest on the interest. The compounding effect is that you're continually getting interest on interest on interest. But the original principal remains the same. i.e. you don't add any money into the account. It just grows interest.

An annuity is when there are some type of payments involved. This can either be something where payments are made working towards something in the future (i.e. college education or retirement, etc.), or it can be something already sitting there and money is being removed from it on a regular basis. (i.e. you have an IRA, have just retired and are going to start taking money from the IRA account, or a loan where the payments are reducing the loan.) Either direction, an annuity must have payments involved, equal payments made at equal times. So like $300 every month, or $2000 every year. So not only is it earning interest, which is compounding, but there are payments involved, either adding to it or being taken from it.

I can't really answer how it "affects" the outcome. Putting $1000 into the bank and letting it compound interest for 10 years is a completely different thing than putting $1000 every year into the bank for 10 years. The latter not only means you put $10,000 in total, but it's going to earn a lot more interest because there's more there.