What Is an Annual Retirement Annuity?

An annuity is a reverse loan. It is a systematic withdrawal (cash flow) from an investment made periodically as a return of interest and principal. You deposit a lump sum and withdraw the same amount each year until it is all paid back.

When you subtract your projected retirement expenses from your expected retirement income, you may find you have a negative cash flow. This negative cash flow is your "retirement cash flow deficit." Once you know what your retirement cash inflow deficit is, you can determine how much you need to save to make up the difference.

For example: let us say you added up your retirement expenses (adjusted for inflation) and your anticipated Social Security and pension benefits and you still need another $42,800 before taxes (retirement cash flow deficit). You estimate that you will need this inflow for 20 years. You expect your investments to earn an average of 10 percent per year.

You can use this chart to help calculate how much you need to accumulate before retirement by dividing the annuity amount ($42,800) by the annuity table factor of 107.

You would need to accumulate another $400,000 to generate an annual retirement annuity of $42,800 per year. Need a guaranteed income? Many retirement plans use insurance company annuities based upon the same principles plus actuarial assumptions to provide an income you cannot outlive.

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