Present Value of Annuity Calculator

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 present value of an annuity can be described as a series of cash contributions that are made over a specific period.

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In this article, you will know more about the present value of the annuity and how the present value of the annuity 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 Present Value of Annuity?

If you invest your money in an annuity plan today, it is important for you to know what is the value of your invested money now and how much money you will be receiving as future payments?

The value of money that the individual invest in an annuity is known as the present value of an annuity. It is directly affected by the interest earned and payments made by the annuitant in the future.

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 Present Value of Annuity

To know the value of the money invested, the individuals can use the present value of the annuity formula. In simple terms, the money invested by an individual holds a great value than the same amount of money they will invest in the future. This is because the investment made by you now has a longer-term period to accumulate interest. Moreover, the value of money invested by an individual will be higher in the long term because of its potential to gain interest.

PV = C x [1-(1+r)-n / r]

  • C= cash flow per period
  • R= interest rate
  • N= number of periods

Sometimes it can be seen that while discussing the present value, the term interest rate is also mentioned as a discount rate sometimes.  While calculating the equation it is important to pay attention to the rate.

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
  • If Annuity payments increases the formula of the present value of growing annuity is to be used

Analysis of Present Value Annuity

The objective behind analyzing the present value of the annuity is to make a foolproof retirement plan for a financially secure future.

Individuals who are making financial planning for their retirement would want to know how much they need to invest today to receive the desired annuity after retirement. Annuities can be very attractive as it provides an opportunity to gain regular income after retirement.

While computing the present value of an annuity, it is important to keep in mind that:

  • The interest rate is fixed
  • Different payment options are available
  • Taxes are applicable on the amount received as an annuity
  • Initial investment should be made one period away from the start of the annuity

Benefits of Present Value Annuity

Here are some of the main benefits that the present value of annuity offers to its policyholder:

  • Helps in planning how much we should invest now to avail the desired cash flow after retirement
  • Majorly used to assess how much a person will pay immediately into an immediate annuity plan to receive the specific amount as an annuity
  • The annuity payments are made after the completion of the accumulation period
  • The formula of the present value of annuity identifies 3 variables
    • The interest rate
    • Cash value of the payments made by the annuitant per period
    • The number of payments within the series
  • The PV of annuity is applicable with a fixed rate of interest and equal payment during the specific period

Conclusion

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 present 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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