Understanding Annuity Future Value: A Long-Term Investment

To assess the future value of an annuity you need to think in the long run. Basically, an annuity is an investment plan where an amount of money is exchanged for a guaranteed income, usually for the lifetime of the recipient. What could be better? You get a constant income for life. There is certainly value in being able to depend on what you will be earning.

The Great Unknown

People are living longer, and if money continues to rapidly decrease in value, as it has for the past fifty years, it will be very difficult to anticipate how much you might need over an extended retirement. For instance, if you retired in 1990 on an annuity of $1200 per month, you're happy and doing pretty well. As time goes on, that amount, although remaining the same, decreases in value. After ten or so years you find yourself struggling, and by 2010 it's totally inadequate. Now, what do you do?

An annuity can be part of your retirement plan. If it is used as a foundation to support your investments, it can stabilize your portfolio. As a sole income it probably won't be adequate in the long run, however.