You and your significant other are pregnant with your first child. You’ve heard about the momentous costs of raising a kid, and you know college will only get more expensive. But more so, you want to leave a legacy. You want to make sure that your kid, to some basic degree, will always be taken care of.
So you take your concerns to your local insurance agent, and he responds “well sir (or madame), we actually have just the product for you!” And from there, he introduces you to the “ANNUITY” --- an investment product you can purchase today that guarantees you payment of a specific amount of money every month for a specified period of time…
He narrows the options down to 2 choices for you:
- THE ANNUITY: $500/month paid out to your child from birth until 30 years of age.
- THE PERPETUITY: $350/month paid to your child FOREVER…. (basically an annuity, but paid perpetually)
Both are priced exactly the same. You figure a decent investment rate of return (and hence discount rate) will always be around 6% annually. So speaking strictly in terms of “economic value,” which is the better buy? Which one should you pick?
BACKGROUND / HINT: So we’ve explored the concept of calculating the Future Value (FV) of a specified stream of constant payments, as well as the Present Value (PV) of a future payment. But now were taking it a bit further… If you need a REFRESHER, click the links above. But if you want a HINT, CLICK HERE!