How it works
An annuity is simply a stream of equal payments — a pension, a structured settlement, lottery winnings taken over time. The question this calculator answers is what that stream is worth in a single lump sum today, and the answer is always less than the payments add up to. Money arriving in year ten is worth less than money in hand now, because money now can be put to work. The calculator discounts each future payment back to the present at your chosen rate and sums them. The discount rate is the whole judgement: it is the return you could reliably earn elsewhere, so a higher rate shrinks the present value and a lower rate inflates it. At 6%, twenty years of $1,500 monthly payments — $360,000 in total — is worth roughly $210,000 today. That gap, the discount amount, is the time value of money made visible. Use it to compare a lump-sum offer against a payment stream, to sanity-check a pension buyout, or to price any deal where money arrives over years. The stream that looks larger on paper is frequently the worse deal once the discount rate does its work.
Formula
PV = payment x [(1 - (1 + r)^-n) / r] | r = rate per period, n = total payments
Tips
- The discount rate is your opportunity cost — use what you could reliably earn elsewhere.
- A higher rate shrinks present value; the lump sum that seems small may be the fair one.
- Compare any buyout or settlement against this number before accepting payments over time.
- Monthly payments are worth slightly more than the same annual total paid once a year.
- The discount amount shows how much of the headline total is just waiting.
Frequently asked questions
- What is the present value of an annuity?
- What a stream of future equal payments is worth as one lump sum today. Because money now can earn a return, future payments are discounted — twenty years of $1,500 monthly payments ($360,000 total) is worth roughly $210,000 today at a 6% rate.
- What discount rate should I use?
- The return you could reliably earn elsewhere — your opportunity cost. For a guaranteed stream, many people use a bond-like rate of 4-6%. Use a higher rate and the present value falls; use a lower one and it rises. The rate is the judgement, the arithmetic is automatic.
- Should I take a lump sum or payments over time?
- Compare the lump sum to the present value of the payments. If the lump sum exceeds that present value, it is the better deal in pure cash terms; if it falls short, the stream is richer. Taxes, your discipline with a large sum, and the creditworthiness of the payer all matter too.
- Why is the present value less than the total of payments?
- Because of the time value of money. A dollar in year ten is worth less than a dollar today, since today's dollar can be invested. The discount amount the calculator shows is exactly that difference — the part of the headline total that is only the passage of time.
- Does payment frequency matter?
- Yes. Monthly payments are worth slightly more than the same annual amount paid once a year, because each payment arrives — and can be reinvested — sooner. More frequent payments always raise the present value a little at the same stated rate.