An annuity is one of the most powerful financial concepts for retirement planning and structured investments. This calculator helps you understand both the present value (what future payments are worth today) and future value (what regular savings will grow to) of annuity streams.
How This Calculator Works
This calculator evaluates annuity values:
- Periodic Payment: The regular payment amount (monthly, yearly, etc.)
- Interest Rate: Expected return per period
- Number of Periods: Total number of payments
- Present Value: What all future payments are worth today
- Future Value: What all payments will grow to over time
The Formulas Explained
Present Value of Annuity: PV = PMT × [(1 - (1 + r)^-n) / r]
Future Value of Annuity: FV = PMT × [((1 + r)^n - 1) / r]
Where:
- PMT = Periodic payment amount
- r = Interest rate per period (decimal)
- n = Number of periods
Step-by-Step Example
Retirement Planning Analysis
Monthly payment of $500 at 6% annual rate (0.5% monthly):
| Scenario | Payment | Periods | Rate/Period | Present Value | Future Value |
| 10 Years | $500 | 120 | 0.5% | $44,955 | $81,940 |
| 20 Years | $500 | 240 | 0.5% | $69,789 | $231,020 |
| 30 Years | $500 | 360 | 0.5% | $83,395 | $502,257 |
Notice how future value grows exponentially with time—starting early makes a massive difference!
Frequently Asked Questions
What is an annuity?
An annuity is a series of equal payments made at regular intervals. Examples include monthly retirement contributions, pension payments, lease payments, or insurance premiums. The key is consistency—same amount, same frequency, for a defined period.
What's the difference between present value and future value of an annuity?
Present value (PV) answers: "What is the lump sum equivalent of all these future payments today?" Future value (FV) answers: "If I make these regular payments, what will I have at the end?" PV is used for valuing streams you'll receive; FV is used for savings you're building.
When would I use present value of an annuity?
Use PV when you need to value incoming payment streams:
- Valuing a pension or structured settlement
- Comparing lump sum vs periodic payment options
- Pricing bonds or loans
- Determining fair value of rent or lease payments
When would I use future value of an annuity?
Use FV when you're planning savings or investments:
- Projecting retirement savings growth
- Calculating college fund accumulation
- Planning systematic investment contributions
- Estimating growth of recurring deposits
What's the difference between ordinary annuity and annuity due?
Ordinary annuity: Payments made at end of each period (most common—loan payments, savings deposits) Annuity due: Payments made at beginning of each period (rent, insurance premiums)
Annuity due has slightly higher PV and FV because payments earn interest for one extra period.
How does the interest rate affect annuity values?
Higher interest rates:
- Decrease present value (future payments worth less today)
- Increase future value (your savings grow faster)
This is why low rates favor borrowers (cheap money) and high rates favor savers (better returns).
What's the relationship between lump sum and annuity?
They're mathematically equivalent! A $100,000 lump sum at 5% is equivalent to ~$7,950 per year for 20 years. This calculator helps you convert between them when comparing options like taking a pension vs lump sum buyout.
How are annuities used in retirement planning?
Annuities are central to retirement: (1) Accumulation phase: Regular 401(k)/IRA contributions grow to a nest egg (use FV), (2) Distribution phase: Nest egg converts to regular income payments (use PV to value what you need), (3) Insurance annuities: Guaranteed income for life based on lump sum purchase.
Key Points to Remember
- Regular payments: Annuities are identical payments at regular intervals
- Time is power: Future value grows exponentially—start early!
- Two perspectives: PV for valuing incoming streams, FV for growing savings
- Rate matters: Higher rates lower PV but boost FV
- Retirement tool: Understanding annuities is essential for retirement planning
- Conversion: Lump sums and annuities can be mathematically equivalent