When planning ahead for retirement, both current and future financial objectives matter. This can include determining how much you need to invest now if you want to have a certain amount of income when you retire… and this is where the present value and future value of annuities comes into play.
Why Both Present and Future Value of an Annuity Matter
Present value and future value are terms that are oftentimes used with regard to annuities. In this case, the present value refers to the sum of money that needs to be contributed now in order to guarantee a certain amount of income payment in the future.
The future value is the dollar amount that will accrue over time when the sum (i.e., the present value) is invested. Therefore, the present value of the annuity is the amount that you must invest in order to realize the future value.
What is the Relationship Between the Present and the Future Value of an Annuity?
There are different types of annuities available in the marketplace. These include immediate and deferred, whereby immediate annuities pay out income right away, and deferred annuities can begin their payout at a time in the future (if at all).
In addition, there are also fixed and variable annuities. The return on a fixed annuity is based on an interest rate that is set by the offering insurance company. Variable annuities, though, base their return on the performance of underlying investments.
With regard to present and future values of annuities, the calculation of each of these figures assumes a regular annuity that has a fixed rate of growth. This is because there are too many uncertainties with variable annuities.
When an annuity is purchased, the insurance company that offers it will take a certain sum of money and invest it (as well as deduct any charges and fees that are due). The owner or annuitant (i.e., the recipient of the annuity’s income) will then receive a preset amount of money in regular intervals – such as monthly or annually – over either a preset time period (like 10 or 20 years) or over his or her lifetime.
It is important to keep in mind that both the present and the future value of an annuity can be dependent on a number of different factors. For example, using the interest rate that is offered by the insurance carrier on the annuity, along with the desired income amount, and the number of payments that are to be made, the present value calculation will discount the value of the future payments in order to come up with the necessary contribution to be made.
Is an Annuity Right for Your Retirement Plan?
Creating a retirement income plan can involve a number of moving parts. But it is definitely something you want to get right because, in this area, there are no do-overs. If you’d like to learn more about how annuities can help you to create a solid and reliable foundation for your income in retirement, Annuity Gator can help.
At Annuity Gator, our mission is on educating consumers and financial professionals on how annuities may fit both before and during retirement. So, feel free to reach out to us any time at (888) 440-2468, or via email through our secure online contact form. We look forward to hearing from you.