After customizing your annuity and making your first deposit, you may want to define the future value of the annuity. In other words, you may wonder how much cash you’ll receive in the future based on the rate of return (aka discount rate).
There are calculations you can do now to figure out how much your annuity account will pay you later. Or, in other words, complete a few formulas to guesstimate the amount of cash you’ll receive someday.
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Remind Me: What’s an Annuity?
An annuity is a financial product that will pay you a sum of money each year or at other regular intervals. Usually, people invest in an annuity so they’ll have a steady flow of income during their future retirement years.
Annuity accounts grow without being taxed and annuity funds can be taken out without a penalty after age 59.5 years. As you may recall, the disbursements you’ll get later will be taxed as ordinary income.
What Can Change the Future Value of Annuity?
Many features of an annuity can be customized or tailored to your particular needs. Whichever combination of annuity options you pick will have a direct impact on the annuity’s future value.
In case you forgot, below are some of the annuity choices you made when setting up your account.
- Do you want a lump sum payment or a series of payments?
- When do you want to start receiving your payments (aka annuitize)?
- Do you want an immediate annuity that pays out right away?
- Or do you want a deferred annuity that will send you cash at a predetermined future date?
- Will you want your disbursements for a set amount of time (e.g., 20 years)? Or do you want to get smaller payments over your entire lifetime?
- Did you select a fixed, variable, or indexed annuity?
- Do you have an ordinary annuity? Or is it an annuity due?
Remember, an annuity is one payment per year. Now if your payments are done when the period finishes, the annuity is known as an ordinary annuity. If the payments are instead done at the beginning of a period then you have annuity due.
Examples of Ordinary Annuity
Ordinary annuity payments can be at the finish of a month, quarter, semi-annual, or annual time frame. If you have an annuity that sends you payments quarterly, then you’ll receive a first quarter (January, February, March) payment at the close of March.
Examples of Annuity Due
To make this easier to understand, let’s think about annuity due as the bills usually due at the beginning of the month (or the designated period). Usually, rent, mortgage, car payments, and insurance are due on the first of the month. The fact that a renter or car owner makes payment on December 1 before enjoying the use of their apartment or vehicle during the rest of the month is what makes it annuity due.
What’s My Annuity Going to Be Worth Someday?
Today might be the day you want to figure out the future value of your annuity. By doing so you’ll have a better idea of how much your deposits will be valued at years later. You’ll need to calculate the future value with the annuity’s interest rate. It’s probably easiest to use the current interest you are receiving for investments in your future value tabulations.
You’ll also have to take into consideration whether you have an ordinary annuity or an annuity due. Again, these are important details that make a difference in how you calculate your annuity’s future worth.
Future Value of an Ordinary Annuity Formula
You could simply plug in the below future value of an ordinary annuity formula into a spreadsheet. This would help you quickly figure out what your retirement payments might be someday.
|P||=||Future annuity payments|
|PMT||=||Amount of each annuity payment|
|n||=||Total number of periods during which payments are made|
An alternative to the above formula is to use a special ordinary annuity table. The one below is a good example of an annuity table you can use as a quick reference. Keep in mind, this is only an example and may not exactly match real-life scenarios.
Future Value of Ordinary Annuity Table
Let’s imagine Lisa expects to make 6 deposits of $10,000 into an annuity investment account. Lisa’s annuity has a 5% interest rate. Lisa will go to her ordinary annuity table, put her finger on the “n” column and move down to the number “6” representing Lisa’s 6 annuity payments.
Then Lisa will follow the “6” row over to intersect the 5% column which has the 6.8019 factor noted. And last, Lisa would multiply the 6.8019 by $10,000 to get the future amount of $68,019.
Future Value of an Ordinary Annuity of 1 Table
Future Value of Annuity Due Table
Let’s go over an example of annuity due calculations. If Harvey plans on making 9 deposits of $10,000 into an annuity fund at the beginning of each quarter, then he has the annuity due type. Harvey’s annuity account has a 6% interest rate (which is a 12.1808 factor on our annuity due table below). Harvey would multiply 12.1808 by $10,000 to get the annuity’s future worth of $121,808.
Future Value of Annuity Due of 1 Table
Is Future Value of Annuity in Your Future?
It’s okay if you are a little put off by all the annuity terms and rules. The one thing to remember is that money saved in an annuity now can be a steady stream of retirement income later. Once you do set up an annuity, you may be curious about its future worth.
With plenty of future value formulas, calculations, and tables, you’ll be ready to count your future cash today.
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