How to Calculate the Present Value of a Growing Annuity Using the Future Value

Start growing your nest egg now so it’s ready when you retire.

Start growing your nest egg now so it’s ready when you retire.

An employer-sponsored pension annuity can be part of your retirement strategy. An annuity is a contract between you and an insurance company. You make a lump sum payment or periodic payments now to receive future payments when you retire. To make sure the future payments will meet your retirement needs, you can calculate the annuity’s present value. The present value is what the annuity would be worth if you cashed in in or rolled it over today.

Gather Your Information

You must use a financial calculator or an annuity calculator for your calculations. Before you can calculate your pension annuity’s present value, you need to gather some information about the annuity. You’ll need to know how much you’ll receive from the annuity each year when you retire, the number of years you’ll receive the payments and the interest rate the pension fund investments earn. You can contact your employer or pension fund administrator to get the information.

Calculate the Future Value

To calculate the present value of your pension annuity, you first have to calculate its future value. You calculate the future value by taking the yearly payment amount you’ll receive when you retire and multiply it by the number of years you’ll receive it. Then you’ll multiply that amount by the interest rate the pension investments earn. For example, let’s say your plan pays you $25,000 a year for 20 years and the pension investments earn 6 percent interest. The calculation would be $25,000 multiplied by 20 multiplied by 6 percent. Your annuity’s future value is $286,748.

Calculate the Present Value

Now calculate what your pension annuity is worth today. You calculate the present value by multiplying the future value by the interest rate. Then you’ll multiply that amount by the number of years until you retire. For example, enter the future value of $286,748 in your calculator. Multiply that amount by 10 years, which is the number of years until you retire. Now multiply that by 6 percent. Your pension annuity is worth $160,118 today.

Adjust Your Retirement Plan

If your pension annuity payout isn’t enough, consider other options that could make up the shortfall. You can open a Roth IRA or a traditional IRA, or make the maximum yearly contribution to an existing IRA. You can purchase your own annuity from a life insurance company or consider purchasing a whole life insurance policy. Your financial planner can help you put together a strategy that will meet your retirement needs.

About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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