When planning retirement income, it helps to understand the difference between an annuity and a perpetuity. Both can provide a stream of payments over a period of time, but they each can serve a distinct purpose. 

Annuities typically generate income for a fixed timeframe or life. Perpetuities can pay out indefinitely, often as part of legacy planning or charitable giving. This article will clarify the key distinctions between annuities and perpetuities and explain when each can be suitable based on your situation.

If you’re considering ways to generate a long-term financial stream, Gainbridge specializes in designing steady income solutions to help you create a comprehensive financial plan and can help you decide between an annuity versus perpetuity. 

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What is an annuity?

An annuity is an agreement between an individual and an insurance company. In exchange for a lump sum or periodic investments, it provides a series of payments over a specific period or for the annuitant’s lifetime.

Common types of annuities include:

• Fixed annuities: These can generate predictable, guaranteed payments based on a fixed rate of interest. 
• Variable annuities: Payments can vary based on the performance of underlying investments, typically an index such as the S&P 500.
• Guaranteed income annuities: These can include guaranteed lifetime withdrawal benefits to ensure steady payouts for as long as you’re alive. 
• Fixed-indexed annuities: Like a variable annuity, growth is linked to a market index, but with built-in downside protection and capped growth. 

One main benefit of annuities is they help retirees replace their paychecks and maintain steady income in retirement to help cover expenses. Gainbridge has options you can align with your budget and larger retirement plan. 

What is a perpetuity?

A perpetuity is a series of equal payments that continue indefinitely. Unlike annuities, perpetuities don’t have an end date. Examples of perpetuities include university endowments and trust setups designed to generate generational income. 

Here’s the key: Perpetuities require an underlying asset or investment that will produce ample returns to enable indefinite payments. Because they require sustained investment growth, they’re uncommon among everyday investors and in personal finance. 

Annuities vs. perpetuities: 3 differences

To understand the differences between annuities and perpetuities, keep these three key points in mind. 

1. Duration

An annuity payout period has an end date. It might be after a number of years, typically 10 or 20. Alternatively, an annuity can last for the life of the annuitant. The bottom line: When the terms ends, the annuity payouts end. 

A perpetuity provides payments that continue forever. When planning an estate, the goal is to make payments generationally. 

2. Payment amount

Insurance companies typically calculate annuity payments based on the time value of money, the discount (interest) rate, and the annuitant’s life expectancy among other factors. With respect to life expectancy, shorter terms often mean higher payments. Longer terms can mean the opposite. 

Perpetuities don’t work this way. They make equal payments and don’t consider life expectancy because there’s no end of the term. 

Pro tip: The time value of money is the concept that means a dollar today is worth more than a dollar in the future because you can invest now and earn interest or returns over time.

3. Capital return 

With an annuity, the owner of the contract generally receives the principal contribution and interest or investment gains in a series of payouts over time. 

Perpetuities don’t return the original investment — they rely on it to make indefinite payments. Interest and gains alone determine payouts with the principal continuously invested to maintain income generation. 

Calculating the present value of a perpetuity

The present value (PV) of a perpetuity formula shows you how much value these indefinite payments hold today. 

The formula is:

PV = C / r (where C = payment, r = discount rate or required rate of return)

For example, if a trust pays $50,000 per year with no end date and the discount rate is 5%, the PV is:

PV = $50,000 / 0.05 = $1,000,000

This PV formula helps determine how much capital is required to maintain perpetual payments. You can run this calculation to gauge the value of lifetime gifts or trusts.

Is an annuity or a perpetuity right for you?

Most investors with an eye on long-term planning will select an annuity as a way to budget and fund their retirement via a series of predictable, guaranteed payments. Some retirees worry about outliving their money and ensuring their spouse and other loved ones are taken care of after they’re gone. Annuities can address this concern and generally require less capital to ensure income flows throughout retirement and to beneficiaries.

Typically, higher net worth investors will look to perpetuities — possibly in combination with annuities and other investments — to establish a financial legacy and support their heirs or a cause indefinitely. It can take a lot more capital, invested continuously, to execute legacy planning with a perpetuity than with an annuity. 

Guarantee your retirement income with Gainbridge 

While annuities and perpetuities can both play a role in a comprehensive financial plan, annuities can be a more secure and straightforward way to start planning your future today. If you're looking for stable long-term income, Gainbridge’s digital-first annuities can help deliver peace of mind. We offer multiple products to help secure your financial future — and we never charge hidden fees or commissions.

Explore Gainbridge today and start building an investment strategy tailored to your financial goals. 

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes.