An annuity is a series of payments made at regular intervals. Annuities can be viewed as an asset or a liability. When you’re making monthly payments on your mortgage the annuity becomes a liability. When you receive rental income every month this annuity becomes an asset.
Annuities can be fixed term or infinite. For example, a loan repayment is usually for a certain number of years. Salary is a form of annuity which lasts for as long as you have a valid employment contract. On the other hand, you can earn rental income from your rentals for a very long time. You can also buy an annuity from an insurance company which pays you a lifetime income.
The value of an annuity depends on the value of the underlying asset or liability. The amount of interest income you earn will depend on the value of the principal invested. Your mortgage repayments depend on the amount borrowed. Your employment income depends on your skills and experience. Your business income will depend on how valuable your business is.
The easiest way to create an annuity is to convert a lump sum amount of time or money into a series of future payments. For example, when you lend someone money you create an annuity asset if you expect a series of monthly repayments for a certain period of time. When you go to University for five years to get a specialty degree you create an annuity asset from future salary payments. When you invest in rentals you create an annuity asset. When you buy an annuity from an insurance company you’re guaranteed income for life after retirement.
ICEA Uganda has a good annuity plan for retirees. You pay an upfront lump sum from your pension or other sources of funding. The plan has a guarantee period within which the annuity is paid irrespective of when the policy holder passes on. They also provide for an escalation in monthly payments to reduce the impact of inflation. There is also an option for a joint annuity which will provide an income for as long as two people are alive and only stops at the
second person’s death. Typically the annuitant would select this type of annuity to be sure that their spouse would receive income for life. You can also choose additional benefits like funeral cover, etc. To be more specific I got a quotation from ICEA with a purchase price of ugx 100m and a guarantee period of 20 years which would pay me about ugx 1m per month. This is not a bad deal for a retiree with a pension of ugx 100m to invest.
Insurance annuities are an excellent choice for people approaching retirement who have accumulated some decent cash and want a guaranteed income in retirement without gambling with risky investments and businesses. Instead of trying to start a chicken project at sixty, it is much safer and more peaceful to buy an annuity.
Becoming wealthy is a matter of creating multiple annuity assets. It’s better if these annuities bring cash into your pocket, are infinite, and don’t require too much supervision. If set up well, these annuity assets will continue to pay you well into the future.