Future Value of Annuity Formula

An annuity is a useful tool while planning for long-term or retirement. An annuity plan is a type of pension plan, which provides regular income during the phase of retirement. The future value of an annuity is the value of a group of recurring payments at a certain date in the future, assuming a particular rate of return, or discount rate.

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In this article, you will know more about the future value of the annuity and how the its calculator works.

But first, let us briefly understand annuity.

What Is Annuity?

When a person thinks of planning his retirement, an annuity can turn out to be a useful tool.

After a person retires, they completely depend on their savings, securities, and investments. Buying an annuity generates an additional income source, that makes life easier after retirement. In a simple annuity plan, payments are distributed to the annuitant in the form of annuities after the pay period.

What is the Future of an Annuity?

When we talk about the future value of an annuity, it means the complete value of annuity payments at a certain time in subsequent tenure. The future value of an annuity is a way in which one can figure out how much money the payments will be worth at a certain point of time in the future.

The Future value of annuity calculation depicts the complete value of a collection of payments within a certain date in the coming times on the premise of a selective rate of return. It is indeed different from the way the present value of an annuity is calculated.

The present value of an annuity calculation gives the present value for the future annuity payments and is different from the future value of the annuity calculation.

The idea of a future annuity is, higher is the discount rate, the greater would be the annuity’s future value.

Types of Annuity

Generally, there are 6 types of annuities:

  1. Immediate Annuity

    The immediate annuity plan starts offering the benefits right from the vesting age. Under this plan, as soon as the policyholder pays a lump-sum amount to the insurer, the payment for annuity starts either for the lifetime or specified tenure.

  2. Deferred Annuity

    It offers an annuity after the completion of the accumulation period. There are two types of deferred annuities:

    1. Accumulation Period

      The period from which the policyholder starts investing in the plan by paying a premium from the date of policy initiation to accumulate a retirement fund for the future 

    2. Vesting Period

      The period from which the insurance holder starts receiving the policy benefits as regular annuity or pension

  3. Periodic Annuity

    Under periodic annuity, the funds are provided to the annuitant at a regular point in time. This is more similar to the system of a pension plan wherein the intervals could be based on every month.

  4. Lump-sum Annuity

    Some annuity plans do give the alternative of giving a single amount payout. Such a singular amount payout is normally discretionary and accessible just at a specific period.

  5. Variable Annuity

    As the name suggests, variable annuity includes varieties in the annuity payments between one payout and the following.

  6. Fixed Annuity

    Under fixed annuity, the payments will stay consistent over the whole time frame during the annuity payments. It is considered to be an ideal plan as it ensures payment to the policyholder soon after the end of the policy tenure.

Formula of Future Value of Annuity

Before we determine the future value annuity formula, it is important to know the representation of the variables as well.

P=PMT × ((1+r)n−1)​
                       r

Where,

  • P: Future value of an annuity
  • PMT: Value of Every Annuity Payment
  • r: Interest Rate
  • n: Number of periods on Which Payments Will be Made

The future value of an annuity formula is used to calculate what the value at a future date would be for a series of periodic payments.

In an annuity plan, the payments can be made in monthly, quarterly, half-yearly, or yearly modes.

It is important to note that in the abovementioned formula,

  • The interest rate should remain the same throughout
  • The investment amount should be distributed equally
  • The first payment is one period away
  • The periodic payment does not change

Future Value of Annuity Calculator

The future value of the annuity calculator is a tool, which helps you to compute the value of the series of equivalent cash flows at a subsequent date.

With the help of a calculator, one can easily estimate the future value of the series of payments done periodically. The annuity calculator could be used to figure out the annuity payment, period and the interest rates provided the values are provided.

The use of a future value annuity calculator lets you calculate the subsequent value of an annuity in regards to an ordinary annuity or even an annuity due.

Importance of Future Value Of Annuity Calculator

  • Indicates payments that you will be receiving at a certain date subsequently
  • Know the worth of payments on the premise of a rate of return that will be consistent
  • Once estimated, planning becomes easier

Wrapping It Up

The annuity calculator helps the individuals to calculate an estimated amount that they will need as an annuity or regular cash flow after retirement. With the help of a future value annuity calculator, one can calculate annuity and create strong financial planning for a secure future.

By keeping all the important aspects in mind, one can plan a stress-free life after retirement.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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