What Is the Formula for an Annuity?

Video Transcript

"This is financial advisor, Patrick Munro, talking about what is the formula for an annuity. Many people don't understand how annuities work, so let me put it simply to you. If you place money with an insurance company, because an insurance company is the the type of company that handles annuity, it is placed in a vessel or a policy that grows tax deferred over time. You receive a document to show how much money you left with the insurance company, and they also give you an annual statement every year. Well, when you're younger and you place more money with the insurance company, it continues to grow, and because you're not taking it out during the "accumulation period" which is the first part of our formula, then you don't have to pay taxes on it, which makes for a better retirement going forward. Keep in mind that most annuities, with the exception of variable annuities, offer you principle protection. The second part of the formula is the distribution phase. So we have the accumulation phase while you're putting money in, and now the distribution phase. This is when you take money out in retirement. So that is the formula for annuities. This is financial advisor, Patrick Munro."