Annuity Table

When you invest in a retirement plan, you can choose to receive pensions as annuities. This means the pension will be paid in regular installments over a set term. You can also make contributions under pension plans in installments. But, if you choose this route, how will you find out the worth of your pension today and at the time of your retirement? To answer this, you can use an annuity table.

What is an Annuity Table?

An annuity table is a tool that helps in determining the present or future value of periodic payments. It gives a factor for each time period (years or months) and interest rate. You can multiply your pension amount by this factor to calculate its worth today (present value) or in the future (future value). This tool, combined with a retirement calculator can help you plan your post-retirement finances effectively.

How Do Annuity Tables Function?

Annuity tables offer present value and future value factors for different interest rates and time periods. You can use these pre-calculated factors to easily determine how much you need to save today or how your contributions will grow over a period of time. The best thing is that you can do so without needing complex formulas.

For example, let’s say you want to receive ₹10,000 annually for 5 years after retirement, and the interest rate is 5%.

To find out how much money you need to invest today to receive those payments, you can refer to an annuity table. The table will give you a factor of 4.329 for 5 years at 5%.

You get ₹43,290 by multiplying ₹10,000 by the factor (₹10,000 × 4.329). This means you would need to invest ₹43,290 today to ensure you get ₹10,000 annually for the next 5 years.

What is an Annuity Table Used for?

An annuity factor table is a helpful tool for both financial institutions and individuals, especially when planning for retirement.

Financial institutions use annuity tables to quickly figure out the value of a series of payments. This helps them set fair prices for products like pensions, life insurance, annuity in NPS, and other payment-based financial plans. Individuals, on the other hand, can calculate how much money they need to save today to get a steady income in the future.

Let’s say you want a certain amount of monthly income after you retire. An annuity table will show how much you should invest now based on the number of years and expected interest rates. It also helps you see how changes in interest rates can affect your retirement savings. Using an annuity table makes it easier to create a realistic savings plan and ensure that your money will last throughout retirement. This way, you can feel more secure about your financial future.

How to Interpret an Annuity Table?

Interpreting an annuity table may seem tricky at first, but it’s quite straightforward once you understand its layout. The table is organized into rows and columns, each representing specific variables used in financial calculations.

• Rows: The rows in an annuity table represent the number of periods, which could be months or years, depending on the payment schedule of your annuity. For example, if you are making or receiving payments over five years, you would look for the row labeled “5” to find the relevant factor for a five-period term.
• Columns: The columns represent the interest or discount rate, expressed as a percentage. The discount rate reflects the time value of money, i.e., how much future payments are worth today. If your annuity uses an interest rate of 6%, you would locate the column labeled “6%.”
• Intersecting Cell: The point where the chosen row and column meet contains a factor. This factor is crucial for your calculation. To find the present value of an annuity, multiply this factor by the periodic payment amount. Similarly, to find the future value, use the future value annuity table and apply the factor in the same way.

Annuity Table for Ordinary Annuities

Ordinary annuities are a series of equal payments made at the end of each period, such as monthly or annually. There are two types of tables for such annuities.

1. The Present Value Table for such annuities looks like this:

• 2. The Future Value Table is as follows:

Present Value of Annuity Table

The Present Value Annuity Table shows how much future payments are worth today based on different interest rates and periods. For instance, if you want to know how much ₹5,000 annual payments over 5 years are worth today at an interest rate of 6%, multiply ₹5,000 by the factor 4.212 to get ₹21,061.80.

Future Value of Annuity Table

The Future Value Annuity Table shows how much future payments will be worth at a specific time in the future. For example, if you want to find out how much ₹5,000 annual payments will grow over 5 years at an interest rate of 6%, multiply ₹5,000 by the factor 5.6371 to get ₹28,185.50.

FAQs on Annuity Table