What is the Present Value of an Annuity? Annuities are payments received from a bank in the future for a specified period of time. Typically, a person receives an annuities from a bank after receiving a degree or following a career change. The value of these annuities is based on the amount of money that was invested and the interest rate and discount rate at the time of the payout.

What is the Present Value of an Annuity? The present value is the total amount of future payments received over a specified period of time, either the time until death or until the maturity date of the annuities, whichever is longer. The greater the discount rate or the lesser of the rate of inflation, the lower is the value of the annuities. The future payment value is usually the sum of the payment values multiplied by the number of years to be paid. If the retirement savings are invested with a low discount rate (e.g., a 10 year annuity), the money may not generate enough income to cover the payments in the long term. In this case, it makes more sense to invest the money in more stable investments that will generate a higher income. Investing in the stock market may pay a higher return than investing the money in the annuities; however, this requires the knowledge and expertise to properly invest the money.

How is the Present Value Calculated? A calculator can be used to calculate the value of the payment. The formula is as follows: present value (current value x discount rate) / life expectancy. For example, if the cash value is $200 per month for 30 years, then the discount rate would be one percent. This means that the money will be worth about $100 in twenty-one years or about $5 in twenty-five years.

How much should I pay for the payment value? Many people make the mistake of paying too much for their annuities. Because annuities have a variable life expectancy, it is important to pay the highest payment amount possible at the beginning of the annuities life, but this does not mean that you should always pay the entire value. If the amount you pay initially is greater than the cash value, you should pay the difference. Over time, the investment value will decline so the amount you pay should decrease as your annuities grow older.

When should I invest the future payment value? Although most people pay the total price over the life of their annuities, you may want to save the value until retirement or cash it in at the end of the annuities life. If you invest the future payment value, you will not be tied to the amount you paid at the time of purchase. This can be very risky and the money is subject to market risks. As such, you may not receive the same returns on your investments as those who pay the entire value at the time of purchase. If you have to pay for the purchase, you may receive less than you would if you had invested the money at the time of purchase and reinvested it later.

Annuities are great investments for those retiring. They are very secure and the payments can be deferred until retirement when they begin to grow with inflation. However, the money you save now may not produce enough interest income to support your lifestyle in the future.