The idea behind "present value" is that money you receive today is worth more than the same amount of money if you were to receive it in the future.
For example, if you receive $5,000 now in one lump sum, it has more value than receiving $1,000 a year for the next 5 years.
Why is it more valuable? Well, time is money, and you could invest the $5,000 lump sum and parlay it into additional revenue.
Conversely, if you could get a return on your money of 6% by investing it, you can see by using our convenient Present Value Calculator that $4,212 received today would have the same value as receiving $1,000 a year for 5 years.
An annuity is a fixed sum of money paid to someone each year, usually for the rest of their life. Since it is a form of insurance, these earnings are a contract between you and an insurance company. You pay the insurance company a lump sum of money or a series of payments, and in return the insurance company issues you regular payments beginning now or at some point down the road.
The purpose of these earnings is to give you a steady flow of income during retirement. Bear in mind that funds like your 401(k) contributions cannot be withdrawn without penalty until you reach age 59.
These payments can be customized for your specific needs. You can contribute to these earnings either in a lump sum payment or a series of periodic payments. And you can choose between immediate payments that begin paying out right away or deferred payments that start the payouts at a later date.
Deferred payments are by far the most popular type in the United States, and they are the best choice for an investor who doesn't need instant income from an annuity.
The length of these payments can vary, as well. You can choose to receive the payments for a specified number of years, or you can choose to receive payments until your death. It's a surefire way to guarantee that you don't outlive your assets and run out of money.
There are three main varieties of annuities:
You have a friend named Jody who promises to pay you $5,000 in five years when her trust fund inheritance first becomes available. You want to help her out, but how much is her $5,000 down the road worth to you right now?
First, you have to decide how stable Jody is, and how risky it would be to advance her money. For argument's sake, let's assume Jody is as risky as the stock market. With that decided, we’ll assign the transaction a discount rate of 11%. The discount rate is your expected return on investment.
After running the numbers through our calculator, you'll see that $2,967 is the maximum you should pay Jody now in exchange for her promised $5,000 in 5 years.
Until recently, present value calculations were the exclusive domain of business consultants and economists, but the array of present day investment opportunities makes it important for the head of a household to grasp the concept.
By understanding how present values are calculated and having access to a high-speed online calculator, you can create a sound financial plan to meet your family's goals and fulfill your dreams. In a sense, this present value calculator is your financial crystal ball. While it can't quite predict the future, it can give you an insight into your financial future - and prepare you for it.
Typically, a child's education is one of the most important purchases you will ever finance. You don't need a calculator to know that it ain't cheap!
But you will need this present value calculator to plan your child's education, or any other major expenses or purchases.
Suppose you inherit $50,000, and you want to know if investing that lump sum will cover your child's tuition and education costs - you've come to the right place.
If your daughter is three years old and you plan to send her off to college at 19, enter 16 years as the length of time and 6% as your discount rate. If you research the recent rising costs of a higher education, you'll see that college is likely to cost approximately $120,000 in 16 years.
The online calculator will instantly show you that you must deposit $47,237 today in order to grow it to $120,000 by the time your daughter is ready for college. $50,000 invested today will indeed accrue enough interest to equal $120,000 in 16 years.
A number of companies allow consumers to cash in annuities early by offering them a structured settlement. J.G. Wentworth is the leading company in the space and has offered billions in payments over the past couple decades. There are a few things to be aware of when negotiating a structured settlement.