About this video
Sal explains two related kinds of annuity: a payout annuity, which pays you regularly (in its purest form until death), and a savings annuity, where you pay in regularly during an accumulating phase before a payout phase. He compares these to IRAs and 401ks, Social Security and pensions, explaining which are closer to pure annuities and why.
You'll be able to
- describe a payout annuity and a savings annuity.
- explain why IRAs and 401ks are not pure annuities.
- explain how Social Security and pensions resemble annuities.
Key words
- payout annuity
- Regular payments to you, in the purest form from when it starts until your death.
- savings annuity
- Paying in a regular amount to build savings that later turns into payouts.
- accumulating phase
- The period when you are paying in and building up savings.
- transfer payment
- Money paid by today's workers that goes directly to people receiving benefits now, as with Social Security.
- defined benefit
- A set payout promised to you, usually over a long period, as with a pension.
Transcript
- [Instructor] Let's talk a little bit about annuities. So I'll make a distinction between two types and they can actually be related. One is a payout annuity. Now you might want to guess what that is, and you might think about from the word annuity. It sounds a lot like the word annual.
Maybe it it's related to something that happens annually, and you would be very close. And a payout annuity over the course of your life. Let's say that this timeline is your life, all the way until you die, right? Over here, hopefully it's many years away. We all will die.
Let's say this is a birth right over here. An annuity, a payout annuity will pay you regularly, from the time it starts paying out oftentimes, in fact, in the purest form of annuity, all the way, all the way until your death. And you might say, that sounds great.
Why am I getting this payment all the way to my death? Well, it could be some type of instrument that you buy from folks. It could be related to retirement in some way. It could be a prize. In fact, sometimes the lottery, you can either get it as a one-time payment, or you could get it as a payment that looks a lot like the annuity.
It might not be forever until you die, but it might be over 20 or 30 years and you can decide. But a pure payout annuity would be from the time it starts paying out all the way to your death, there are things that are close to it that might happen for 10, or 20, or 30 years.
Now, related to that is something called, and I'll do this in another color, a savings annuity. Savings annuity. And a savings annuity is you paying in a regular amount. Actually, lemme just use the same timeline here, but I'll do it. So this is you. Well, you're not gonna start paying in, you're gonna be too young to work there.
But let's say you start paying in to it into some type of an account regularly. Could be in a retirement account, or it could be something else. So this is when you are accumulating right over here. So this is the accumulating phase of a savings annuity. And so that's why it's called savings, 'cause you're actually saving money.
And then at some point it will go into the payout phase, just like we said over there. Now let's make this a little bit more tangible with things that you might have heard of. You might have heard of retirement accounts like IRAs and 401 Ks. These are not pure savings annuities, but these can be close to it.
You're paying in many cases, a regular amount, every paycheck, during your working lives. And then when you retire, you get payouts. Now, the difference between a savings annuity, or the difference between something like an IRA or 401k, and a pure savings annuity, or a pure payout annuity is, this doesn't give you a guaranteed payout over the course of your life.
It really just puts the money into an account. And then once you're retiring, you can actually deplete that account pretty fast, and that account can run out of money. So this isn't the purest, this isn't a pure annuity in that sense. Now you also have things like social security.
Social security in many ways looks a little bit pure. You keep paying over the course of your working life, and then once you qualify, you get a payout until death. Now, the reason why some might not call this a pure annuity, is you're paying into a common pool.
You don't have an account with your name on it. And actually the way that Social security works, it's really a transfer payment. You are paying now to pay for the social security of the people who are getting the benefits right now. But you are due those benefits from.
So from your point of view, assuming that the social security system stays solvent, you are going to get an annuity like stream in the future. Now, another thing that you might see at work, although this has become a lot less popular compared to IRAs and 401 Ks are pensions, and social security.
There are payroll taxes that are essentially the things that are paying in and pension money is being taken out so that you can get a benefit, a defined benefit over a long period of time. And once again, it is usually until your death. So I'll leave you there.
This is just a general idea of you could keep paying money, it's really accumulating that as savings, and then you can get paid out as an annuity. As a payout annuity. And there's a bunch of things in our life that approximate some version of it.
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