You know you’re a grown-up when 1) you're at a dinner party, and 2) the dinner party veers into a hot discussion on annuities and present values. But before you go all-in and invest in your very own annuity, you'll want a little extra help from an expert. And in this case, the expert you need is an independent insurance agent.
An independent insurance agent is a trusted advisor to those who are dedicated to establishing a financial safety net for their futures, and they deal with annuities and the biggest companies that carry them on a daily basis. That means they know all the ins and outs to help get you the financial peace of mind you need. So why not start off with a little more information about present values of annuities where the dinner party convo left off.
Defining the Present Value of Annuity
The present value of annuity is basically the amount of cash you need to invest today in order to get a specific payout later. In other words, first imagine the amount of cash you’d like to get regularly during your retirement. Second, you'll need to find out how much you’ll need to invest today to make that happen. So it's like working backwards. The present value will be your initial investment. Pretty simple, right? But, there is more to it.
Present Value of Annuity Factors
The most important thing to know is that all the tiny puzzle pieces that go into an annuity and its present value are different from one investor to the next. That's because each annuity comes with different features and a few unique factors that will influence the present value of annuity, like:
- Interest rate: Fixed or variable, the interest rate can either change based on the market, or stay the exact same. That's something you're able to decide with your agent, but it will play a factor in your initial investment needs.
- Preferred payment amount: It should be no surprise that the amount you get later depends on the amount you put in at the beginning. So if you want large payments later in life, you'll pay a large amount now — and vice versa.
- Number of payments: The longer the period you want to receive money for, the more you'll have to invest in the beginning — and again, vice versa.
Finding Your Present Value of Annuity
There are loads of textbooks and websites out there that can show you the present value of annuity formula, but unless you're some kind of master mathematician, you probably don't want the headache of doing all the math yourself. Luckily, an even better option is right here for you — present value of annuity tables.
Using a present value and annuity table (like a lil' cheat sheet) is a much easier way for you to know how much cash to invest, at what interest rate, and for how long. It takes all the guesswork out of financial planning, and the math too. Once you get a good idea of your investment level needed, your independent insurance agent can help make sure it's the right amount for you and get the ball rolling.
Present Value of Ordinary Annuity Table
An ordinary annuity makes payments at the end of a month, quarter, or year. This factor will change-up your present value and actually make it much easier to discover.
Instead of a standard present value annuity formula that looks like it may take a master's degree to solve, you can just follow along on a present value annuity factor table (aka present value interest factor annuity table). Many people like to use a table with 60 periods (or 60 rows) but here we’re going with 5 here instead, just to make it easy.
Present Value of an Annuity of $1 in Arrears Table
For a printable 50-period Present Value of an Ordinary Annuity of 1 Table PDF, click here.
Say Amanda wants to get 5 payments of $10,000 each with her established interest rate of 6 percent. She'll look at this present value of annuity in arrears table, follow the “n” column to the number “5” which represents her 5 annuity payments. Then she'll follow that row to the right, until she gets to the 6% column, which says 4.2124. This is called the factor. Finally, she'll multiply the 4.2124 by $10,000 to get the present value amount of $42,124. That is what Amanda needs to invest to get her 5 payments of $10,000. Pretty simple, right?
Present Value of Annuity Due Table
You have an annuity due if the payments come at the beginning of the month, quarter, or another specified time frame. Again, when payments are done will alter the present value.
Present Value of an Annuity Due of 1 Table
For a printable 50-period Present Value of an Annuity Due of 1 Table PDF, click here.
Let’s imagine Mark wants 10 payments of $20,000. With an 8% interest rate (a 7.2469 factor on the annuity due table), he'd multiply 7.2469 by $20,000 to get the annuity’s future worth of $144,938.
Present Value of Deferred Annuity Table
A deferred annuity is one that puts off payments until the investor decides they want to receive them. Luckily, figuring out the future value of a deferred annuity is the same as figuring out the future value of an ordinary annuity.
Present Value of Deferred Annuity Table
For a printable 50-period Present Value of Deferred Annuity Table PDF, click here.
Say Melissa thinks she’ll be able to invest $60,000 through 4 equal payments at an 8% interest rate. The annuity table shows she should multiply 3.3121 by $60,000 savings and will end up with a present deferred value of $198,726.
Present Value of Growing Annuity
A growing annuity (also called an increasing annuity) is just as it sounds, the payments will grow (or increase) as time goes on. To establish the present value for this type of annuity, you'll need to understand the current value of these future payments that grow at a steady rate.
Now, the present value of growing annuity formula has a few more elements than other annuity types, but it's not too bad. To establish your present value, you’ll need to know:
- Payment amount: This is the money you plan on receiving/paying during the 1st period.
- Payment growing rate per period: This is the percentage you think your regular payment will increase by from one month, quarter, etc. to the next.
- Interest rate per period: Usually you'd use your annuity’s fixed interest rate (normally an annual percent) for this part.
- Number of time periods: If your interest rate is calculated monthly then you’ll use . Basically whatever time period is used to calculate your interest rate is what you use here.
- Annuity type: Either you have an ordinary annuity or annuity due.
Present Value Growing Annuity Table
|Period||Starting balance||Payment||Interest||Ending Balance|
For a printable 60-period Present Value Growing Annuity Table PDF, click here.
Our imaginary friend, David, starts his annuity with a $2,000 payment and will pay that same amount every period. David's interest rate is 4 percent. That means by the time David reaches his 12th payment of $2,000, his total annuity balance will be $51,246.54.
So What's Next?
You no doubt now have a much better idea of how to find the time value of money tables, present value annuity. Obviously there are many different ways of lookin' at basically the same idea. Hopefully, the tables helped put it all into a better light for you. And really, feel free to print out these tables to help you compare the policies side-by-side. When you talk to your local independent insurance agent, feel free to ask them any questions you may still have, and they can help you understand exactly what you should invest now to get what you need later.
Good luck, and happy retirement when the day comes.