Future Value Of An Annuity

AAA

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.)

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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 FAQS
  1. Is Social Security Income a perpetuity?

    Because Social Security income does not continue indefinitely, it cannot be classified as a perpetuity. What Is a Perpetuity? A ... Read Full Answer >>
  2. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
  3. What is the difference between a bond's yield rate and its coupon rate?

    An annuity is an investment in which a person receives a fixed sum of money annually. Coupon payments received by a bondholder ... Read Full Answer >>
  4. Is an annuity a perpetuity?

    An annuity can be a perpetuity, depending on how it is set up. An annuity is an investment that makes regular payments throughout ... Read Full Answer >>
  5. What are the most common deferred tax assets used by individuals?

    Deferred tax assets – those that are only taxed when funds are withdrawn or the asset is sold – are quite common in estate ... Read Full Answer >>
  6. Are annuities for seniors only?

    Though annuities tend to be advertised primarily to seniors, there is no reason why younger generations should not make the ... Read Full Answer >>
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. Professionals

    Pension Annuity vs. Lump Sum: Which is Best?

    Which pension distribution option best serves your client, a pension annuity or a lump-sum payout?
  8. Fundamental Analysis

    Calculating the Present Value of an Annuity

    The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate.
  9. Investing Basics

    Are Annuities Right for You?

    Annuities are safe and often appealing, but IRAs and 401(k)s offer advantages that annuities typically can’t match, with little additional risk.
  10. Insurance

    Understanding Cash Surrender Value

    The amount of money an insurance company pays the owner of an insurance policy if the policy is voluntarily surrendered prior to the event that is insured

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!