Calculate Simple and Compound Interest

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This calculator and tutorial are illustrative only and assume no withdrawals are made. Nassau Simple Annuity rates are only guaranteed for the term of the contract. Rates may vary and are subject to change.

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Simple Interest and how it works

Simple interest is interest that is paid on a principal amount of money.

It's calculated by looking at the principal amount borrowed or paid, the rate of interest, and the time period it will cover.

Here's how to calculate simple interest

Principal x rate x time = interest

For example, say your initial principle is $100 and your annual rate is 5%. After 1 year the simple interest calculation is:

$100 x .05 x 1 = $5 simple interest for one year

The interest rate (5%) appears as a decimal (.05). To do your own calculations, you may need to convert percentages into decimals. An easy trick for remembering this is to think of the word percent as "per 100." You can convert a percentage into a decimal by dividing it by 100. Or, move the decimal point two spaces to the left. For example, to convert 5% into a decimal, divide 5 by 100 and get .05.

If you want to calculate simple interest over more than 1 year, calculate the interest earnings using the principal from the first year, multiplied by the interest rate and the total number of years.

$100 x .05 x 3 = $15 simple interest for three years.

Compound interest and how it works

Compounding is a process of growing. If you're familiar with the "snowball effect," you already know how something can build upon itself. Compound interest is interest earned on your principle plus money that was previously earned as interest. This cycle leads to increasing interest and income at an increasing rate, sometimes known as principal growth. Most fixed annuities pay compound interest.

For example, if you earn 5% interest compounded annually, a premium of $100 would gain you $5 after a year. What happens the following year? That's where compound interest comes in. You'll earn interest on your initial principal, and you'll earn interest on the interest you just earned.

Therefore the interest you earn the second year will be more.

  • Year One: An initial premium of $100 in a fixed annuity earns 5% interest, or $5, bringing your balance to $105.
  • Year Two: Your $105 earns 5% interest, or $5.25; your balance is now $110.25.
  • Year Three: Your balance of $110.25 earns 5% interest, or $5.51; your balance is now $115.76.

Example for illustrative purposes only. Actual rate and term may vary. Assumes no withdrawals are made.

How you can take advantage of compound interest

There are ways that you can make sure that compound interest works in your favor. Save early and often: When growing your money, time is your friend. The longer you can leave your money untouched in a fixed annuity, the greater it can grow, because compound interest grows exponentially over time.

What Makes Compound Interest Rate Powerful?

Compounding happens when interest is paid repeatedly. The first one or two cycles are not especially impressive, but things start to pick up after you add interest over and over again.

Frequency: The frequency of compounding matters. More frequent compounding periods have more dramatic results.

Time: Compounding is more dramatic over long periods. When money is left alone it grows.

Interest rate: The interest rate is also an important factor. The longer the time period, the more impact there is on growth. But compound interest can overcome a higher simple interest rate. Especially over long periods, an account with compounding but a lower rate can end up with a higher balance than an account using a simple calculation.

Premiums: When purchasing a fixed annuity, withdrawals and premiums can also affect your contract value. Withdrawing money from your fixed annuity will reduce your contract value and future growth. Surrender charges and taxes may also apply to withdrawals.

Starting amount: The more money you start with, the more interest you will accumulate both initially and over time.

Here's how to calculate compound interest

You can calculate compound interest in several ways to gain insight into how you can reach your goals and help you keep realistic expectations. Any time you run calculations, examine a few “what-if” scenarios using different numbers and see what would happen if you save a little more or earn interest for a few years longer.

A = P (1 + [ r / n ]) ^ nt

To use this calculation, plug in the variables below:

  • A: The amount you'll end up with (future value)
  • P: Your initial amount, known as the principal (beginning value)
  • r: the annual interest rate in decimal form
  • n: the number of compounding periods per year (for example, monthly is 12 and weekly is 52)
  • t: the amount of time (in years) that your money compounds

Here's an example: You have $1,000 earning 5% compounded monthly. How much will you have after 15 years?

  1. A = P (1 + [ r / n ]) ^ nt
  2. A = 1000 (1 + [.05 / 12]) ^ (12 * 15)
  3. A = 1000 (1.00417) ^ (180)
  4. A = 1000 (2.11497)
  5. A = 2114.97

After 15 years, you'd have roughly $2,114. Your final number may vary slightly due to rounding. Of that amount, $1,000 represents your beginning value, while the remaining $1,114 is interest.

Important Disclosures

Financial calculators and calculations are for educational and illustrative purposes only. Nassau makes no representations as to the accuracy or suitability of the information provided. You are encouraged to speak to a financial professional before making any insurance, investment or financial planning decisions.

Annuity contracts may be subject to possible loss of principal and earnings, since a surrender charge and market value adjustment may apply to withdrawals or upon surrender of the contract.

Annuities are long-term contracts. Annuities held within qualified plans do not provide any additional tax benefit. With certain exceptions, surrender charges apply to withdrawals taken during the initial guarantee period and a market value adjustment, which may increase or decrease the amount received upon withdrawal, may also apply at any time.

All or a portion of amounts withdrawn are subject to ordinary income tax, and if taken prior to age 59 1⁄2, a 10% IRS penalty may also apply. Nassau does not provide tax, financial or investment advice, or act as a fiduciary in the sale or service of the product. Consult a tax advisor or financial representative about your specific circumstances.

The information above is intended for use by the general public and is not individualized to address any specific investment objective. It is not intended as investment, tax or financial advice. We encourage you to consult with an advisor who can tailor a financial plan to meet your needs.

Nassau does not provide investment or financial advice or act as a fiduciary in the sale or service of its products.

Product features, options and availability may vary by state. Guarantees are based on the claims-paying ability of the issuing company.

Nassau Single Premium Deferred Fixed Annuities (18FADTCP and ICC18FADTCP) are issued by Nassau Life and Annuity Company (Hartford, CT). In New York, annuities (Form 17IMGA) are issued by Nassau Life Insurance Company (East Greenbush, NY). Nassau Life and Annuity Company is not authorized to conduct business in ME and NY, but that is subject to change. Nassau Life and Annuity Company and Nassau Life Insurance Company are subsidiaries of Nassau Financial Group. The insurers are separate entities and each is responsible only for its own financial condition and contractual obligations.

In California, Nassau Life and Annuity Company does business as "Nassau Life and Annuity Insurance Company."

Insurance Products: NOT FDIC or NCUAA Insured, NO Bank or Credit Union Guarantee

This is a brief description of Nassau Simple Annuity and is meant for informational purposes only. Please refer to your Contract for any other specific information including limitations, exclusions and charges.