Playbook #034: Annuities

🖼️ The Big Picture

Annuities have been an easy way to take a lump sum of money and turn it into regular cash flow payments. They have been around for hundreds of years. Even going back to Ancient Rome, people would make an upfront payment in return for regular cash flow payments over their lifetime.

Annuities are for a very specific type of person. That might not be you today, but could be at some point. But they’ve long been a tool of the rich to plug in large amounts of money and get stable and guaranteed cash flow that won’t dry up before you die… so they’re something you want to know about, even if you aren't yet in a position to use them.

Here’s how they work:

You buy a fixed, variable, or indexed annuity, which is a contract between you and a financial institution (usually an insurance company) with either a lump sum upfront or payments for a certain amount of time.

In return, the insurance company agrees to make regular payments to you starting on a particular date, and for a certain length of time (like 20 years) or until you or your spouse dies.

In the meantime, the insurance company invests all of the funds they’ve raised in order to generate the returns needed to pay you.

If you come into a lot of money, like winning the lottery or receiving a massive inheritance, and you just want to “set it and forget it” — then an annuity might work well for you.

The downside is that the returns aren’t exciting (at current rates they don’t even come close to beating inflation) and your money is locked away for at least several years, with significant penalties to withdraw early.

Remember, this is the opposite of a moonshot. It’s a wealth preservation and cash flow vehicle. Whether it fits or not at this moment, it’s something you should know enough about to use, when and if the time comes.

🔢 By The Numbers

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