Future Value Of An Annuity

See: Annuity. See: Future Value.

Investing can be scary. Or it can be fun, but if we’re planning on using our investments as our primary income source during our golden retirement years, there can definitely be some scariness.

Annuities are one way to relieve some of the fear. These little guys basically collect the cash we put into them and then start paying it back to us, at a fixed rate, plus interest, by a predetermined date. We decide when the payments start, and we also decide how often we get them and when they end. They’re a nice, low-risk way to help make sure we won’t be completely broke when we’re old and gray.

So how do we know how much an annuity is going to be worth when the time comes? In other words, how can we calculate the future value of an annuity? Easy, we just do this:

FV = AMT x [ (1 + r)n – 1 ]
r

See? Super simple. Oh, what do the letters stand for? Yeah, guess that would be helpful info to have.

“FV” is the future value of the annuity. That’s why we’re all here. “AMT” is the amount of each payment we put into the annuity, “r” is the interest rate, and “n” is the number of payments we plan on making. So...if we plan on putting ten dollars a year over eleven years into an annuity, and we’re expecting an average annually-compounded interest rate of 5%, we get this:

FV = 10 x [ (1 + .05)11 – 1 ]
.05

Looks like our annuity will be worth somewhere in the neighborhood of $142. So that’ll be a nice chunk of change to retire on. Not exactly enough for that second home in the Hamptons, so, uh...maybe set aside more than ten bucks to invest.