# Deferred Payment Annuity

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Definition

An annuity is essentially a finance related contract, which permits the person who is buying it to pay on a lump-sum basis or make payments in series, in return for acquiring disbursements at regular intervals in future. Deferred Payment Annuity is a type of an annuity in which the payments that are received start somewhere in the future instead of starting at the time it is initiated.

Deferred payment annuity generally provides tax-deferred development and growth at a variable or fixed rate of return, similar to a regular annuity. Deferred payment annuity is usually bought for under-age or small children so that the benefit payment amount can be postponed till they complete a certain or desired age. Such annuities are extremely helpful when it comes to planning for retirement.

How to Calculate Deferred Annuity?

A deferred annuity is essentially an investment vehicle that is sold by companies that provide insurance to people. The value of a deferred annuity can typically be calculated in two different ways i.e. future based value or present based value. It is these particular values that can assist you in determining the amount you should invest in order to fulfill your investment related goals.

Present Value Calculation

As per this method, you need to take the present value i.e. the amount you are thinking of investing today, into consideration. Next, you will have to provide definitions for the variables. For example, if you wish to make a saving of 100,000 dollars by the time a decade comes to an end and you come across an annuity that would offer you a minimum of 5% return on an annual basis, then your present value would typically be a minimum of 61,391 dollars today.

Future Value Calculation

For this, you will have to make note of the future value, which is the amount that you would receive after the maturity of the annuity. Next, define all the variables. For example, if you are planning to make an investment of 10,000 dollars and wish to find out how your asset would grow in case you were to get a 5% rate of interest over a period of twenty years, then your investment’s future value would be 26,532 dollars.

Quote Guest, 10 June, 2015
I think for your present value calculation you are using 5% return on an annual basis, not 3% as stated in the text.

The present value of an amount of \$100,000 10 years using 3% is \$100,000/(1+0.03)^10=\$100,000/1.344=\$74,409

The present value of an amount of \$100,000 10 years using 5% is \$100,000/(1+0.05)^10=\$100,000/1.629=\$61,391.
Quote , 10 June, 2015
Thank you Guest, corrected!
Quote Guest, 3 March, 2017
The present value of an amount of \$100,000 10 years using 3% is \$100,000/(1+0.03)^10=\$100,000/1.344=\$74,409
Quote Guest, 14 March, 2019
How does the (1+0.05) equate to 1.629? Or how did you get 1.629