If you are thinking about getting an annuity, you may wonder what the deal is all about. How can a seemingly secure form of income rise and yield you a high percentage when you need it the most? The annuity deals that are available today are very different than they were just a few short years ago. In the past people could just lump some money into an annuity and call it a day. Those days are gone and you can now choose from several different plans. You have many options to choose from when you are deciding on your annuity needs.
The present value of an annuity simply is the amount of future payments received, at a given rate of interest, from an annuity. The higher the discount rate offered, the less the present value of your annuity. Using a present value calculator can help you determine if you will receive more cash now by accepting a lump sum payment today or by receiving an annuity over time…
In order to determine the present value of your annuity you must first calculate what your payments are going to be over the course of the expected lifetime of your annuity (many companies ask for this amount in advance). This is done through some simple mathematics, since depending on what kind of annuity you are getting, you will either get a fixed or variable rate. It is also important to remember that because of the time value of money, if you purchase a variable rate annuity now, you will probably lose money in the future. If you purchase a fixed rate annuity when interest rates are low, you may actually be saving money over time.
A common question often asked concerning the present values of annuities involves the retirement benefit factor. Basically this can be described as how much money you will receive over your retirement. Because of this factor it is important to have a good understanding of the mathematical formula used to calculate it. In order to do this you must first know what the discount rate is, since it is one of the most important factors used in the calculation. Basically the discount rate determines how much your monthly annuity payments are going to be at any given time. For example, if your discount rate is 7%, then your payments will be spread out over the course of your retirement.
When using a discount rate, you will need to also take into consideration the amount of time before you will reach retirement. This will be figured into the life expectancy of the person who is buying the annuity. This will be done based on their current age and current health. Once you take all of these things into consideration, you will be able to determine how long it will take you to receive all of your annuity payments made over the next five years. Then you simply add up all of your monthly payments and five years is the time it would take to receive all of that money.
The final component to figure out is the compounded annual value. This is basically the amount of interest that will be included with your annuity in the future. You need to figure out the amount of compound interest that will be added onto your initial value each year that you are retired. This is a very useful way of keeping track of how much money you are making in the initial period after you purchase the annuity because of the high level of compounding that occurs.