Annuities and perpetuities are both investments that pay you money on a regular basis. However, when and how long the payments last differ. Annuities are flexible; they can deliver money to you over a set amount of time of your choosing or in one lump sum. A perpetuity is rigid; in full force, it will deliver the same check to your mailbox for the remainder of your life. To understand the differences of each, consider how each of them work.
This popular retirement tool involves an initial investment that, after a period of time, is paid out to the investor. How you receive the payments varies. They can be paid monthly or annually over 20 years or made in one lump sum, and payments can be made until the investor dies. Annuities can be considered fixed or variable. In a fixed annuity, the investor gets the same payments throughout the length of the payout. A variable annuity has payouts that rise and fall with the market.
These are never-ending flows of payments. This seems like a great investment idea, particularly if you want a conservative financial vehicle with a no-fuss amount of money at the end of the day. However, perpetuities do have a downside. The original investment is never returned to the owner, and that investment never appreciates. This is an issue because those never-ending payments eventually will be worth less with inflation. For instance if the original investment of $100,000 has a 3 percent interest rate, the investor can expect payments of $3,000. In 20 years, this amount will not pay for as much as it does in today’s dollars. In 40 years, it will be even less. A variable annuity has a better chance of growing as time goes on.
Examples of Perpetuity
Preferred stock shares closely resemble a perpetuity. Purchasers of preferred shares receive regular fixed payments, or dividends, from the issuing company. However, if the company goes bankrupt or experiences financial difficulty, payments can be stopped or deferred until times are good. Another example of perpetuity investment are long-dated bonds, such as those issued by the United Kingdom around World War I. These 100-year bonds live up to the definition of a perpetuity because they pay out almost immediately. A growing number of universities in the United States also have issued such bonds. For example, "Forbes" reports that the University of Pennsylvania issued $300 million in 100-year bonds in 2012 with an interest rate of 4.674 percent.
Where Annuities and Perpetuities Meet
The annuity realm has perpetuity-like product known as an immediate annuity. Also called an income or payout annuity, it allows the investor to put down a sum of money and then begin to receive payments immediately thereafter. For instance, an investor may choose to receive payments on a monthly basis, in which case the payments would start the month following the initial investment.
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