The annuity present value is used to define the present value of the upcoming payments. This annuity has a set price or a rate of discount. This means that the more the discount rate you get, the lesser the present value of an annuity you have to pay.
Still, need us to help you understand this? No problem. Continue to read through to find out how it can help with retirement planning too.
Present Value of an Annuity Explained!
Present value is a cardinal estimation today. It falls back on the concept of the time value of money. This means that any amount of money today is a lot more powerful than the money you receive tomorrow.
For starters, it is cardinal for you to know that an annuity is a series of payments. This generally comes in the form of installments over a period of time. It also comes in two different types- Deferred and immediate.
While the immediate annuity payments get paid back as soon as possible, deferred may require some time to start.
It is believed that the time value of money that you receive today will be more than the one you can obtain tomorrow. Since you can invest the money today, you can have a better future using the same. So, due to the meantime investment, if you have Rs. 50,000 today, the same amount over five months would be Rs. 10,000 each.
Importance Of Present Value Of An Annuity
This type of payment is essential today since it renders the liberty of individuals to value the concept of present annuity value over future payments. Simply by estimating this, individuals can receive a comprehensive analysis of what is better for them.
When making financial decisions, this can be even more important. For example- if you are thinking about seeking money from a pension plan, you can try to understand whether it is best for you to take the money whole or receive it in monthly installments.
Present Value And The Discount Rate
When you are trying to estimate your present annuity value, the discount rate must be taken into consideration. This is a form of interest rate that is assumed, which can help you chalk out the future value of payments.
These rates help you comprehend the present value of your finances and whether it makes more sense to take it over a period of time in installments or leverage it together. You must also note that the discount rate that estimates your present value estimation is different from the rate of interest that you may get on your annuity.
The Formula To Estimate Present Value Of An Annuity
Here is the formula applied to estimate the present annuity value.
P = PMT X 1- ( 1
P=Present value of an annuity stream
PMT= The amount of every annuity
n= The numerous periods over which you can make the payments.
Why Is Future Value Cardinal To Investors?
Contrary to the present value of an annuity, the future value is the value of the present asset over a futuristic period of time. This relies upon the rate of growth.
This can help investors to map out how much they can make by investing the same amount today for later years. In this process, they can make sound investment choices that can help them become more wealthy over the years.
The present value of an annuity can assist you to perform comprehensive and sound retirement planning too. With this, it will be suitable for you to compare whether the amount you can receive today is much better or the ones that you can receive as a stream of installments.
Note that you must get in touch with your insurance provider today and extract more information about the same before you invest in it. This will help you comprehend all the benefits and features it can offer to you and how you can leverage it for an improved tomorrow.