Calculating the future value of an annuity is an important part of financial planning. An annuity's value is the sum of money you'll need to invest in the present to provide income payments down the road. Using the present value of an annuity can help you project future cash flow and estimate the payments you'll receive. Whether you use an annuity formula or an annuity calculator, proper valuation can help you make the best decision for your financial situation.
The future value of an annuity is the total amount of money you'll receive over the term of the annuity. The future value of an annuity is a function of the present value, the interest rate, the number of payments, and any additional payments. By using the FV function in Excel, you can determine the future value. The syntax is “=FV(interest rate, NumberOfPeriods, AdditionalPayments, PresentValue, Type)”. If you don't want to invest in Excel, you can buy an expensive calculator.
Annuity Table Example. Here's an example of the present value for an ordinary annuity. Let's say you have a $500 annuity with a 5% interest rate over five years. The present value of the annuity would be $2,251. You'll receive the largest amount each year with a life-only annuity, which stops payouts when you die. If you're married, you also have the option of selecting a joint-and-survivor annuity, which pays out until both of you die.
Another option is a longevity annuity, Littell said. A longevity annuity is a type of annuity that pays out a fixed income starting at a future date. As the name suggests, a longevity annuity pays out over a longer period of time. Littell recommended using the life expectancy calculator at Livingto100.com to get an estimate of your life expectancy. This will help you determine the right type of annuity for your needs.
Student loans are considered invest in the debtor's future, and the annuity model can be used to calculate their value. In some cases, a debtor may be able to settle their loan for a lump sum less than the loan's full principal. In this settlement, they may be able to pay a reduced amount of the debt in exchange for a lump sum payment. The lump sum payment is considered a present value, and the monthly payments are the future value of the loan.
Alternatively, if no lump sum is withdrawn, then the full invest amount must be used to purchase an annuity. This can either be a living annuity, which pays out for the life of the invest, or a deferred annuity, which pays out at a future date.
Other annuities are deferred, meaning payments begin at a future date. For example, an immediate annuity pays out right away, while a deferred annuity pays out at a later date. Using an annuity calculator can help you estimate how much money you'll receive over the term of the annuity and the present value of the annuity.