Future Value Of An Annuity


DEFINITION of 'Future Value Of An Annuity'

The value of a group of payments at a specified date in the future. These payments are known as an annuity, or set of cash flows. The future value of an annuity measures how much you would have in the future given a specified rate of return or discount rate. The future cash flows of the annuity grow at the discount rate, and the higher the discount rate, the higher the future value of the annuity.

This calculation is useful for determining the actual cost of an annuity to the issuer:

Future Value Of An Annuity

C = Cash flow per period
i = Interest rate
n = Number of payments

This calculates the future value of an ordinary annuity. To calculate the future value of an annuity due, multiply the result by (1+i). (Payments start immediately instead of one period into the future.)

BREAKING DOWN 'Future Value Of An Annuity'

The basis is that providing a lump sum of $5,000 today costs more than providing a cash flow of $1,000 per year for five years. This is because if you provide the lump sum today, you could have invested it and received an additional return.

Using this example, and assuming a discount rate of 6%, the future value of an annuity that pays $1,000 per year for five years is $4,212 (1,000*[(1+0.06)5-1/0.06]=5,637). This means that if you could get a return on your invested funds of 6% per year, providing an annuity of $1,000 per year would be worth $637 ($5,637-$5,000) more to the issuer than giving a lump sum.

  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  3. Dedication Strategy

    A method by which the anticipated returns on an investment portfolio ...
  4. Annuity Table

    A method for determining the present value of a structured series ...
  5. Annuity Due

    An annuity whose payment is to be made immediately, rather than ...
  6. Future Value - FV

    The value of an asset or cash at a specified date in the future ...
Related Articles
  1. Investing Basics

    Calculating The Present And Future Value Of Annuities

    At some point in your life, you may have had to make a series of fixed payments over a period of time - such as rent or car payments - or have received a series of payments over a period of time, ...
  2. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  3. Home & Auto

    An Overview Of Annuities

    These contracts provide a guaranteed income stream. Learn how they work and their benefits.
  4. Options & Futures

    Selecting The Payout On Your Annuity

    Make sure you understand your options for withdrawing your funds from this complex instrument.
  5. Options & Futures

    Personal Pensions: Repackaging The Annuity

    Discover an investment that can provide a stable income once you've left the work force.
  6. Retirement

    The Cost Of Variable Annuity Guarantees

    These products tempt investors with some impressive benefits - but they come at a price.
  7. Investing Basics

    Pairing Annuities and Target Date Funds: Top Tips

    The Treasury and the IRS have issued new guidance on pairing annuities with target date funds. Here's a look.
  8. Professionals

    Rising Rates and Annuities: What You Shoud Know

    The Fed is likely to increase interest rates sometime soon. How will this affect the annuity market and when you should buy one?
  9. Retirement

    Are Annuities Retirement-Only Investments?

    Learn more about why annuities are generally purchased and the way that they can positively and negatively affect an individual preparing for retirement.
  10. Retirement

    Do You Have a Crummy 401(k)?

    High-cost, outdated plans can keep your retirement portfolio from thriving. Here's what to do – and the 2015 Supreme Court case that could help.
  1. How liquid are variable annuities?

    Variable deferred annuities and variable immediate annuities are not considered liquid. Variable deferred annuities carry ... Read Full Answer >>
  2. Do variable annuities have RMDs?

    Variable annuities are not subject to required minimum distributions (RMDs) unless they are held in qualified plans, such ... Read Full Answer >>
  3. Can variable annuities be rolled into an IRA?

    Variable annuities are often found in government or nonprofit employer retirement plans such as 403(b) or 457(b) plans. With ... Read Full Answer >>
  4. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  5. Are variable annuities protected from creditors?

    Whether your variable annuity is protected from creditors depends on the state in which you live. About three-quarters of ... Read Full Answer >>
  6. Are variable annuities tax deferred?

    Variable annuities are tax-deferred. This means an investor does not pay taxes on the interest income from his annuity until ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center