The Future Value of an Annuity formula is used to calculate the value of a series of periodic payments at a future date from an annuity based on the rate of return, value of payments, and the periods to maturity of an annuity. The higher the rate of return, the greater is the annuity’s value. In an ordinary annuity, payments are made at the end of each agreed-upon period. In an annuity due, payments are made at the beginning of each period.
Knowing the future value of your annuity can be useful when planning for your retirement or any other aspect of your financial life. Once an investor knows how much money annuity payments may be worth, assuming they invest and have a certain rate of return, investors can make plans based on their expected income.
The basic equation for the future value of an annuity is for an ordinary annuity paid once each year. Using values for the following variables and the formula above, the Future Value of an Annuity can be calculated easily by investors for the purpose of making informed financial decisions.
The Periodic Payment amount is the expected amount to be paid by an annuity annually until it matures at its maturity date. Should a future value annuity make payments more often than annually, the value for periodic payments must be adjusted to reflect the new payment amount. For example, a semi-annual future value annuity makes 2 payments per year and the payment amount should be divided by 2.
The rate of return is the expected rate of return of a future value annuity that adjusts for interest, inflation, and other factors. It is the percentage value in which a future annuity grows over its maturity. If a future value of annuity makes payments that differ from an annual basis, the value for rate of return must be adjusted. For example, a future value annuity making semi-annual payments should be divided by 2 to reflect the compounding effects of the semi-annual interest value.
Periods to Maturity reflect the life of the future value annuity, generally a number of years that the future value annuity must be held until it reaches maturity. This number must be adjusted for future value annuities that make payments that differ from an annual basis. For example, a future value annuity that has a maturity time of 5 years but is semi-annual in nature would have 10 periods until maturity as 2 payments a year for 5 years, 2 times 5, results in 10 periods until maturity.
The Future Value of an Annuity is the final value equated by performing the calculation of the Future Value Annuity formula. This is the stated future value of an annuity to investors after taking into consideration the rate of return, payment amount, and periods to maturity.
The formula for the future value of an annuity varies slightly depending on the type of annuity. Ordinary annuities are paid at the end of each time period. Annuities paid at the start of each period are called annuities due. Many annuities are paid yearly. However, some annuities make payments on a semi-annual, quarterly or monthly schedule.
For this example, we will examine an ordinary annual future value annuity with a rate of return (r) of 12%, a maturity of 10 years, and regular annual payments of $1,000 per year. The calculation for the value of this annuity is as follows:
FV = C * ((1+r)t-1) / r
FV = 1000 * ((1+0.12)10-1) / 0.12
FV = $17,548.74
The future value of this annuity to an investor is $17,548.74. Based on this value, an investor can make decisions regarding whether or not to invest in this annuity.
The key advantage of the Future Value Annuity calculation is the value to investors in regard to making investment decisions. It allows investors to plan for the future and calculate the future value of an annuity investment based on payments, interest and inflation, assuming these factors remain static for the life of the annuity
Knowing the future value of your annuity can be useful when planning for your retirement or any other aspect of your financial life. Once you know how much money your annuity payments may be worth, assuming you invest and have a certain rate of return, you can make plans based on your expected income.
Future value of an annuity is a tool to help evaluate the cash value of an investment over time. It is primarily used to measure how much that series of annuity payments would be worth at a specific date in the future when paired with a particular interest rate. The Future Value Annuity calculation is only effective with a fixed interest rate and equal payments during the set time period.
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