How this number is made
The present value of an annuity is the lump sum that matches a string of payments at a discount rate. Pension choices and lawsuit settlements are this math plus a fight about the rate.
- The discount rate is the rate you use to compare, not the pension’s own guess.
- Payments are monthly and constant.
Formula
Present value = payment × (1 − (1+r)^−n) ÷ r.
Worked example
With the figures already in the form, present value is $227,288.
Questions
Which rate is fair?
A higher rate makes the lump sum look smaller. The party writing the check prefers a high rate. You should know whose rate you typed.
Does this last for life?
No. It lasts the years you typed. A lifetime pension needs a mortality assumption this page does not have.