Future Value of Annuity

The future value of an annuity is the total value of a series of equal periodic payments after those payments have earned interest or investment return over time.

It answers a common question: if you contribute the same amount regularly, how much will you have by the end of the saving period?

How It Works

Each payment compounds for a different length of time.

The earliest payments have the most time to grow, while the last payment has the least. That is why the future value of an annuity is larger than simply adding up the contributions when the return rate is positive.

Worked Example

Suppose an investor contributes $500 at the end of each month into an account earning a positive periodic return.

The future value of the annuity will be the sum of all contributions plus the compounding earned on each contribution. The total at the end of the period will therefore exceed the raw contribution total.

Scenario Question

A saver says, “If I contribute the same amount every month, my ending value is just monthly deposit times number of months.”

Answer: That ignores compounding. The future value of an annuity includes both the deposits and the return earned on earlier deposits.

Related Terms

• Annuity: The underlying stream of equal periodic payments.
• Time Value of Money: The core reason equal payments have different future worth depending on timing.
• Compound Interest: Compounding is what turns repeated contributions into a larger accumulated amount.
• Future Value of an Annuity: An alternate phrasing for the same concept.
• Annuity Due: Payment timing changes the future value because payments occur earlier.

FAQs