Let’s start with the word "annuity." In this form of investment, you pay a lump sum now for the promise of annual payments down the road. So you might give a check to an insurance company for $200,000. For this money, the company agrees to pay you $1,000 a month starting 20 years from now. They will pay this money no matter how long you live (or, sometimes, even longer than you live...See: Annuity Certain).
In making this deal, you give up some potential upside (you aren't going to be able to invest...or spend...that $200,000), but you get security (you know you'll get the $1,000 a month no matter what).
You might guess that the word "annuitization" comes from "annuity." You'd be right! The annuitization rate is just a way of measuring the payout of an annuity. You might think of the annuity payment in terms of the amount you are receiving each month. But remember: an annuity is an investment. You need some way of comparing the amount of money you invest with the benefit you are receiving.
The annuitization rate shows the relationship between the payments you are receiving and the lump sum you initially put in.In the example we discussed before, you paid $200,000 and were receiving $1,000 a month. Doing a little math, $1,000 a month equates to $12,000 a year. Divide the $12,000 annual payout by the $200,000 you contributed, and the annuitization rate is 6%.
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Finance: What is Perpetuity?44 Views
finance a la shmoop. what is a perpetuity? forever. that's what you should think
when you hear the word perpetuity. well a perpetuity is a cousin to an annuity.
in an annuity you invest a given amount of money and then you get a portion of [100 dollar bill]
that dough paid out to you over a set number of years, or in the vein of a life
insurance policy it gets paid out until you are you know doing backstroke Six
Feet Under. and annuity sunsets well basically when you. do but a perpetuity [skeleton in the ground]
outlives you. it pays forever even when you're dead. so why would anyone want one
of these things? well they work for university scholarship endowments. you
know like think about a great Italian literature philanthropist named well
let's say Bella pepperoni. no offense to our Italian shmoopers out there. she made [woman wears name tag]
her fortune analyzing the works of Dante and Machiavelli and wants to endow a
scholarship for other PhDs in Italian Lit forever. well she'd put in say a
million bucks and it might get invested in half and bonds half in stocks with
yield and the throw from that million bucks might be something like a four or
five percent a year or forty or fifty grand and that would be more than enough [equations on screen]
to cover the basics for a PhD in Italian lit well more or less forever as
dividends get raised in stocks bro and all that stuff. the million bucks just
remains invested 50/50 stocks and bonds and the world continues to spin so yeah
even when she's no longer around to enjoy the fruits of her labor as well [headstone shown]
that fruit doesn't spoil develop mold and start to smell bad even if we can't
say the same for her. sorry. just keeping it real. [woman's picture next to casket.]
that's perpetuity. goes forever. perpetual.
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Technically, an annuity is any kind of regularly scheduled payment, usually made annually, quarterly or monthly...for the life of the recipient. Ev...