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Present value is the amount of money needed to generate a specific return. Future value is the balance an account will accrue over time. Here are how these values of annuity are calculated.
Any form of recurring or ongoing payment is known as annuities. In case of annuity plans, a policyholder generally invests a lump sum amount in receiving a steady income after retirement. In a way, this helps retirees continue receiving a type of salary even after they stop working.
But while annuity plans are popular for retirement planning, the amount one chooses to invest in the plan needs careful consideration. After all, this lump sum investment will determine the payouts policyholder will receive after retirement. Calculating the present value and future value of the annuity is the right way to begin.
The present annuity value is the current worth of the annuity payouts that a policyholder will receive in the future, depending on the insurer’s guaranteed rate of return. In other words, it helps one know the lump sum amount that should be invested in order to receive the desired annuity payouts after retirement.
As the calculation is used to determine the value of future annuity payments, it also helps determine whether an immediate annuity or a deferred annuity would be the right choice for an individual. Note that the calculation is based on the concept of the time value of money, wherein it is believed that the money received today has a higher value than the same amount received in the future.
The formula for present value of annuity calculator is as follows-
PV = P * [1 - ((1 + r) ^(-n)) / r]
P: Periodic Payment,
r: Periodic Interest Rate,
n: Number of Years
The future annuity value is the total value of recurring payouts paid to the policyholder at a specific future date and a fixed discount rate. In simpler words, this calculation will help you know the true worth of the payments you are making towards an annuity plan at a future date.
This can help you make smarter investment decisions and plan your retirement as per your financial objectives and goals.
Given a set interest rate, the future value of the annuity formula is used to measure how much a series of regular payments will be worth at some time in the future. So, if you plan to invest a certain amount each month or year, it will tell you how much you will have amassed at a later period. If you make regular loan payments, the future value might help you calculate the overall cost of the loan.
The formula for calculating the future value of an annuity is as follows-
FV of annuity = P * [((1 + r) ^(n)) - 1 / r]
P is the Periodic Payment,
r is the Periodic Interest Rate,
n is the Number of Years
If these formulas are too confusing for you, a simpler alternative is to use an online annuity calculator. Most of the top insurers have this tool available on their websites to make it easier for buyers to choose the right annuity investment amount as per their retirement objectives.
If you are still unable to decide after using the annuity calculator, it’d be wise to get in touch with the insurer to get all the assistance you need. As the amount you invest in an annuity plan will determine the future payouts, be very careful with the amount you select to ensure that you can live your retirement years exactly how you’ve always imagined.
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