How To Calculate The Present Value And Future Value Of Annuities?
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How To Calculate The Present Value And Future Value Of Annuities?

View Plans
  • 22nd Dec 2021
  • 617

How To Calculate The Present Value And Future Value Of Annuities?

Any form of recurring or ongoing payment is known as annuities. In the case of annuity plans, a policyholder generally invests a lumpsum amount to receive 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 lumpsum investment amount will determine the payouts the policyholder will receive after retirement. Calculating the present value and future value of the annuity is the right way to begin.

Why Should You Calculate Present Annuity Value?

The present annuity value is the current value of the annuity payouts a policyholder will receive in the future, based on the discount rate or the rate of return guaranteed by the insurer. In other words, it helps one know the lumpsum 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.

How to Calculate Present Value of Annuity?

The formula for calculating the present value of annuity is as follows-

PV = P * [1 - ((1 + r) ^(-n)) / r]

Here,
P is the Periodic Payment,
r is the Periodic Interest Rate,
n is the Number of Years

Why Should You Calculate Future Annuity Value?

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.

How to Calculate Future Value of Annuity?

The formula for calculating the future value of an annuity is as follows-

FV of annuity = P * [((1 + r) ^(n)) - 1 / r ]

Here,
P is the Periodic Payment
r is the Periodic Interest Rate,
n is the Number of Years

Annuity Calculator- A Simpler Way to Calculate Current Value and Future Value of Annuity

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.

- A Consumer Education Initiative series by Kotak Life

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