What Is an Ordinary Annuity?

An ordinary annuity is a financial arrangement where payments are made or received at the end of each period, typically monthly, quarterly or annually. Common examples include mortgage payments, bond interest and retirement withdrawals. Unlike an annuity due, where payments occur at the beginning of each period, an ordinary annuity structures cash flows in arrears. This distinction affects the present and future value of the annuity, making it a useful concept for understanding loan schedules, investment returns and long-term financial planning.

A financial advisor can help you create a financial plan for your retirement needs and goals.

The Basics of Annuities

An annuity has three defining features.

First, it involves a series of payments made toward a larger obligation. A car loan, for instance, qualifies as an annuity because it requires recurring payments, while a one-off bill such as a cable charge does not.

Second, each payment is equal in amount. A student loan requiring $800 every month is an annuity because the payment never changes.

Third, the payments occur at regular intervals: monthly, quarterly or weekly. If the schedule is irregular or linked to something other than time, it does not meet the definition of an annuity.

In investing, the term often refers to a financial product designed to provide income at a later stage. A common example is the lifetime annuity, purchased during a person’s working years and structured to deliver fixed monthly payments during retirement.

What Is an Ordinary Annuity?

An ordinary annuity is a series of equal payments made at the end of each payment period. For example, with a monthly interval, the payment occurs at the end of the month rather than the beginning. This timing affects how the annuity’s present and future values are calculated, since each cash flow is delayed until the close of the period.

This structure contrasts with an annuity due, where payments are made at the start of each interval. A common example is apartment rent, which is usually due at the beginning of the month.

Common examples of an ordinary annuity include:

Home mortgages: Homeowners make mortgage payments at the end of each month.
Income annuities: For example, lifetime annuities also typically make payments at the end of each month.
Dividend payments: Typically paid at the end of each quarter.

What Makes an Ordinary Annuity Different?

SmartAsset: What Is an Ordinary Annuity?

The distinction of an ordinary annuity comes down to present value. Present value reflects the time value of money, which is the idea that a dollar today is worth more than a dollar received in the future because it can be invested to earn a return.

With an ordinary annuity, payments occur at the end of each period. This means the payer holds onto funds longer, giving them more time to invest or earn interest, while the recipient receives cash later and therefore at a lower present value.

Take a $2,500 mortgage payment as an example. Because the payment is due at the end of the month, the borrower can potentially use that money for an extra 30 days of growth or interest. For the lender, however, that same 30-day delay reduces the payment’s value compared to an annuity due, which would deliver cash at the start of the period.

Interest Under an Ordinary Annuity

The present value of payments also changes the relationship each party in an ordinary annuity has to interest.

When interest rates go up, the value of an ordinary annuity goes down for a lender. This is because the nature of an ordinary annuity is such that it ties up the lender’s money for an extra month. Take our example above in the context of a higher-interest environment. The homeowner has an additional 30 days to take advantage of those greater potential gains while the bank has to lose out on 30 days of better returns.

Under an annuity due, the bank would be able to invest that $2,500 earlier to capture an extra 30 days’ worth of returns at a higher interest rate.

Bottom Line

An ordinary annuity is defined by equal payments made at the end of each period, shaping how both present and future values are calculated. From mortgages and income annuities to dividend distributions, the timing of these payments influences who benefits more from holding or receiving funds. Shifts in interest rates further affect the value of these cash flows, particularly for lenders. Recognizing how ordinary annuities function provides a clearer picture of the trade-offs involved in common financial agreements and long-term planning tools.

Tips for Saving

One way to strengthen your savings strategy is to buy an annuity that will help you generate additional income once you retire. But it’s important to understand the pros and cons of annuities before deciding.
An annuity may be one of many sources of retirement income, alongside pensions, IRA distributions and other savings. Use our retirement calculator to see if you’re on pace to meet your eventual retirement income needs.
The rules around annuities are complex and can be difficult to navigate. That’s why it pays to speak to a financial advisor who can explain your options and help you decide whether annuities should be part of your retirement plan. SmartAsset’s free tool and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.