Annuity Future Value
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A deferred annuity is an insurance contract where you invest money now and receive regular income payments starting at a future date (the deferral period). It combines a savings phase (accumulation) with a later income phase (annuitization), making it popular for retirement planning.
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Tip: Compare annuity rates against simply investing in a low-cost index fund and withdrawing 4% per year. Annuities guarantee income you can't outlive, but index funds may outperform over long periods.
- 1Accumulation phase: money grows (tax-deferred in a traditional annuity)
- 2Deferral period: typically 1–30 years before income begins
- 3Annuitization: convert lump sum to regular income payments
- 4Value at start of income = PV × (1+r)^deferral years
| Feature | Deferred Annuity | Immediate Annuity |
|---|---|---|
| Income start | Future (after deferral) | Immediately (within 1 year) |
| Purchase | Single premium or contributions | Single large premium |
| Best for | Younger investors (20–50) | Near/at retirement |
| Tax treatment | Tax-deferred growth | Portion taxable on receipt |
| Surrender charges | Yes — early withdrawal penalty | No — income has started |
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Fun Fact
Annuities were first used by the Roman government to pay soldiers — soldiers could invest money and receive lifetime income (an 'annua' — annual payment). The concept has been used continuously for over 2,000 years.
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