Future Value of an Annuity
Candlefocus EditorFor example, if you were to invest $25,000 for twenty years, and estimate a return rate of 5%, the future value of the annuity would be $76,200. This calculation is made by collecting the exact amount of each payment, then multiplying that amount by a series of annuity factors to measure the total amount. In this example, the annuity factor of 55.286 is calculated by plugging the five percent return rate, twenty-year payment schedule, and one payment at the end of each period into the formula.
An annuity due is similar to an annuity, except that payments are made at the beginning of each period. For example, if you are paying $300 each month on a mortgage, you would pay at the beginning of each month. As a result, this would create an additional compounding period, leading to a greater future value than the same annuity payment made at the end of the period.
Future value of an annuity can also be used for personal savings objectives. It's a great way to manage a series of payments towards a future value goal, such as retirement or college funds. In this case, the annuity payment amount is the amount that you are striving to save each month, the number of periods is the number of months that you plan to save, and the rate of return is the predicted return that your fund will earn over the period of time. For example, if you put $200 a month into a retirement fund for 20 years with a 10% rate of return, you will have a future value of $162,920.
Although future value of an annuity is an important calculation in financial planning, it is important to understand that there are a host of other factors that should be taken into account as well, such as costs, plan fees, and other expenses that could reduce your return rate. Future value of an annuity should also be used in combination with other established investment strategies and risk management principles to create a balanced overall financial plan. By understanding the future value of an annuity and working with a qualified financial advisor, you can make more informed decisions about your money.