The future value of an annuity is the total value of a group of payments at some point in the future. An annuity is a series of payments, or cash flows, paid at regular intervals. The issuer of an annuity, which is usually an insurance company, will consider the annuity’s future value when determining the amount of the payments. In order to make an informed decision about whether an annuity is a good investment, an investor must know the future value of the annuity in order to compare it to other investments that are available.
The calculation of the future value of an annuity takes into account the time value of money, which is the concept that a sum of money at the present time is worth more than the same sum, or a series of payments, in the future. The assumption is that the money will earn interest if invested, making the present value of the lump sum today greater than it would be in the future. The present value interest factor is used to calculate the amount of money received now that would be equal to a series of payments in the future. This is the inverse of the calculation to determine future value of an annuity.
An investor who is considering depositing a lump sum of money and receiving periodic payments would use the future value of an annuity calculation in order to determine the total value of the payments to be received. The future value of an ordinary annuity or the future value of an annuity due would be used, depending on whether the payments are to be received at the beginning or the end of the period. If an investor is offered a series of payments in the future, he would use the present value income factor to determine the lump sum amount that would generate those payments.
Because the calculation to determine the future value or the present value interest factor is fairly complex, an investor can use a time-value calculator to determine the future value of an annuity or the present value interest factor. Knowing the future value of an annuity will enable the investor to determine if the return on the investment meets his investment objectives. Because annuities have advantages and disadvantages over other types of investments, such as stocks, mutual funds, or CDs, it is worthwhile to calculate the annuity’s future value in order to make an educated decision.
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