Present Valuation Structured Settlement Calculator
This calculator figures the present value of a sum of money to be received in the future.
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How to Figure Out the Present Value of a Future Sum of Money
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.
What is an Annuity?
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 Bear in mind that funds like your 401(k) contributions cannot be withdrawn without penalty until you reach age 59.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 doesnt 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. Its a surefire way to guarantee that you dont outlive your assets and run out of money.
Types of Annuities
There are three main varieties of annuities:
- Fixed annuities pay you a guaranteed amount according to your account balance. They are safe but pay out a very modest return, just slightly higher than a CD would yield.
- Variable annuities are a little different because the issuer (an insurance company) guarantees you payments that may fluctuate over time. Of course, there is a possibility that these payments may increase substantially.
- Indexed annuities are a type of fixed payment, a conservative safe haven for retirement dollars that is linked to a stock index that determines your interest rate.
The Online Calculator in Action
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 arguments sake, lets 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, youll see that $2,967 is the maximum you should pay Jody now in exchange for her promised $5,000 in 5 years.
Why You Need This Calculator
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 familys goals and fulfill your dreams. In a sense, this present value calculator is your financial crystal ball. While it cant quite predict the future, it can give you an insight into your financial future - and prepare you for it.
Terms You Should Know
- Future Lump Sum: Answer the question, How much would I like to have saved up by a certain time in my life? Enter the dollar amount as the future lump sum.
- Present Value Discount Rate: Use the interest rate at which the present amount will grow. Enter it as a percentage value, i.e. 11% instead of .11.
- Present Value of Money: The amount of money you have to invest now in order to reach your lump sum goal in time.
- Discount Interest Earnings: The total of the discounted interest earnings, or your profits from investment. It shows how much compound interest you will accrue over time.
Calculating the Future
Typically, a childs education is one of the most important purchases you will ever finance. You dont need a calculator to know that it aint cheap!
But you will need this present value calculator to plan your childs 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 childs tuition and education costs - youve 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, youll 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.
Negotiating a Structured Settlement
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.
- Selling an annuity before reaching the age of 59 1/2 can lead to additional federal taxes and penalties.
- Some annuities may have surrender charges as high as 10 percent.
- While TV advertisements make structured settlements sound quick and easy, transactions have to go before a judge to approve them. The transaction process typically takes between 2 and 3 months. The payee must prove to the judge they have a legitimate immediate need for the money.
- The companies offering structured settlements have far more actuarial information than the payee does. Typically an annuity owner can help offset some of the assymetrical information advantage by shopping a number of players against each other to get a more competitive discount rate. It is important to do this early in the process, as it usually takes months to receive payment.
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