The future value of a pension annuity involves calculating a set amount of contributions over a period of time that earn a specific interest rate. Calculating the pension's value is beneficial in retirement planning because a contributor can change his amounts to reach his retirement goals. For example, a person pays $1,000 a year into his pension. The pension plan earns 6 percent interest per year. The individual plans on retiring in 30 years.
Add 1 to the interest rate then raise the number to the power of the number of times the annuity compounds per year. In our example, 1 plus 6 percent equals 1.06. Then 1.06 raised to the power of 30 equals 5.743491173.
Subtract 1 from the number calculated in Step 1. In our example, 5.743491173 minus 1 equals 4.743491173.
Divide the number calculated in Step 2 by the interest rate. In our example, 4.743491173 divided by 7 percent equals 67.76415961.
Multiply the number calculated in Step 3 by the pension contribution per year. In our example, $1,000 times 67.76415961 equals $67,764.16. So if the person saves $1,000 per year in his pension, in 30 years he will have $67,764.16 in the pension.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.