How to evaluate an annuity
Guaranteed 8.2% annual return sounds too good to be true. Am I   right? Are there likely high fees, etc.? You're right. Guaranteed annual return is impossible, especially when you're talking about investments for such a long period of time. Ponzi (and Madoff) schemed their investors using promises of guaranteed return (see this note in Wikipedia: In some cases returns were allegedly determined before the account was even opened.[72]). Her financial advisor doesn't charge by the hour--he takes a   commission. So there's obviously some incentive to sell her things,   even if she may not need them. Definitely not a good sign, if the advisor gets a commission from the sale then he's obviously not an advisor but a sales person. The problem with this kind of investment is that it is very complex, and it is very hard to track. The commission to the broker makes it hard to evaluate returns (you pay 10% upfront, and it takes awhile to just get that money back, before even getting any profits), and since you're only able to withdraw in 20 years or so - there's no real way to know if something wrong, until you get there and discover that oops- no money! Also, many annuity funds (if not all) limit withdrawals to a long period, i.e.: you cannot touch money for like 10 years from investment (regardless of the tax issues, the tax deferred investment can be rolled over to another tax deferred account, but in this case - you can't). I suggest you getting your own financial advisor (that will work for you) to look over the details, and talk to your mother if it is really a scam. "Annuities are usually not good deals. Commissions to the salesman can be as high as 9% of the initial premium. They're not scams, just not the best deals for most circumstances. Basically, these things are a combination of an investment vehicle and multiple insurance policies, including permanent insurance. The 8.2% ""return"" is the total cash value of the account, which your heirs get if you die." You can get no load annuities through some no-load financial companies like Vanguard so to start with I'd see how what she is being offered compares with something that comes free of a sales load. I'd also question that fixed rate, seems pretty impossible to me, which makes me think there is some catch or 'gotcha' that we are not seeing that either brings down that rate, or makes it delusional (they are kidding themselves) or deceptive in some way.  In any case it's setting off my 'too good to be true' alarm at full volume, along with the 'shark attack' alarm as well. (I would strongly suspect the 'advisor' is advising the product that makes the most money for him, NOT what is in your mother's best interest)  A fixed annuity is an insurance product, not a security, because the insurance company must credit the annuity holder’s account with the specified interest rate for the contractually-stipulated time period, regardless of market fluctuations in actual interest rates. It is the insurance company that bears the investment risk, which it does by investing the annuity holder’s purchase proceeds in fixed-income instruments that the company hopes will provide sufficient return to fulfill its contractual representations to the holder.  THIS is why there is no prospectus (it's not a 'security' they are not required to provide one by SEC) because the risk is entirely with the company. Obviously as pointed out in the comments, the company could easily go out of business (especially of they sell a lot of these and can't find a way to get that kind of return on the invested money).  Now, ask yourself, if I was the insurance company, would I be comfortable guaranteeing that level of return over that much time if I intend to make a profit from it, pay sales comissions, and stay in business?   In terms of 'will they stay in business' I'd have a hard look at their ratings, and go compare where that is on the total range for AM Best (they are lowest 'secure' rating, next thing down is in the 'vulnerable' category) and Standard and Poors (4 places down from their best rating, next thing down is 'marginal' followed by 'poor')   You might also want to see if you can get any idea of historical ratings, is this company's ratings falling, or rising?   Personally, for the amount of money involved, I'd want a company with MUCH higher ratings than these guys..  THEN maybe someone could say 'no risk', but with those ratings?  an no, I don't think so! BTW I'd check over what this bozo (um sorry, that's not fair to clowns) is recommending she do with her own funds as well.  For example is he recommending she take something that is already tax sheltered such as an IRA and investing the stuff inside that in an annuity (kind of pointless to 'double shelter' the money, or lock it up for a period of time when she may be required to make withdrawals) make sure you don't see something there that is actually against what is in her best interest and is only done to make him a comission. You need to see that prospectus.  I just met with some potential new clients today that wanted me to take a look at their investments.  Turns out they had two separate annuities.  One was a variable annuity with Allianz.  The other was with some company named Midland Insurance (can't remember the whole name). Turns out the Allianz VA has a 10 year surrender contract and the Midland has a 14 year contract.   14 years!!!   They are currently in year 7 and if they need any money (I'm hoping they at least have a 10% free withdrawal) they will pay 6% surrender on the Allianz and a 15% surrender on the other. Ironically enough, they guy who sold this to them is now in jail.   No joke.
"Lots of good answers here about budgeting and other ideas.  Here's a couple more: Think about offense and defense.  Offense is how much money you make.  Are you making enough to survive on?  Is there a way you could bring in more income?  Defense is what you do with your money.  Do you have expensive habits?  Do you have problems with impulse spending?  Do you live in an expensive area with a high cost-of-living?  Think about some of these areas and pick one to attack first. If it is the defense side that is causing you problems (you did mention trying to live on less), consider reading Your Money or Your Life by Joe Dominguez and Vicki Robin.  There's a really good summary of it on the authors' site.  The basic idea of the mechanical part of the book is that you figure out how much you're truly making per hour, and then evaluate your expenses based on how many hours of your ""life energy"" you are using for that expense.  Then you evaluate whether you think that's a fair trade or not.  There's a lot more to it than that, but it's an interesting way to get a different perspective on your spending habits, and may be enough to entice you to change those habits." Pension in this instance seems to mean pension income (as opposed to pension pot). This money would be determined by whatever assets are being invested in. It may be fixed, it may be variable. Completely dependant on the underlying investments. An annuity is a product. In simple terms, you hnd over a lump sum of cash and receive an agreed annual income until you die. The underlying investment required to reach that income level is not your concern, it's the provider's worry. So there is a hige mount of security to the retiree in having an annuity. The downside of annuities is that the level of income may be too low for your liking. For instance, £400/£10,000 would mean £400 for every £10,000 given to the provider. That's 4% and would take 25 years to break even (ignoring inflation, opportunity cost of investing yourself). Therefore, the gamble is whether you 'outlive' the deal. You could hand over £50,000 to a provider and drop dead a year later. Your £50k got you, say, £2k and then you popped your clogs. Provider wins. Or you could like 40 years after retiring and then you end up costing the provider £80k. You win. Best way to think of an annuity is a route to guaranteed, agreed income. To secure that guarantee, there's a price to pay - and that is, a lower income rate than you might like. Hope that was the kind of reply you were hoping for. If not, edit your OP and ask again. Chris. PS. The explanation on the link you provided is pretty dire. Very confusing use of the term 'pension' and even if that were better, the explanation is still bad due to vagueness. THis is much better: http://www.bbc.co.uk/news/business-26186361 You really should consider sitting down with an independent financial advisor to run the numbers for the various options and discuss what risks you're comfortable with and what your requirements/goals are. This isn't a simple decision,  unfortunately. Advice I've seen suggested that some portion of the money should stay in the market, earning market rate of return. Exactly how much, and invested in what, is complicated. An annuity is essentially an insurance policy.  The company assumes the risks and promises you specific payments in exchange for keeping the money.  They wouldn't do so if they didn't think that on average they'll pay out less than the combination of your purchase price plus earnings, so you really are paying a fee for this service. Whether it's worth that cost -- and for how much of your money -- depends on how much you have saved and how risk-tolerant you are. I'm going to steal a moment here to point out that many charities offer annuities. These may or may not pay out less than commercial annuities,  but the profits go to a better cause either way. If you plan to leave part of your estate as donation to a charity anyway, this basically lets them have the money earlier while you continue to receive income from it. First let's define some terms. Your accrued benefit is a monthly benefit payable at your normal retirement age (usually 65). It is usually a life-only benefit but may have a number of years guaranteed or may have a survivor piece. It is defined by a plan formula (ie, it is a defined benefit). A lump sum is how much that accrued benefit is worth right now. Lump sums are based on applicable interest rates and mortality tables specified by the IRS (interest rates are released monthly, mortality annually). Your plan can either use the same interest rates for a whole year, or they can use new ones each month. Affecting your lump sum is whether your accrued benefit is payable now (immediately, you are age 65), or later (deferred, you are now age 30). For example, instead of being paid an annuity assume you are paid just one payment of $1,000 on your 65th birthday. The lump sum of that for a 65 year old would be $1,000 since there would be no interest discount, and no chance of dying before payment. For a 30 year old, at 4% interest the lump sum would be about $237 (including mortality discount). At age 36 the lump sum is $246. So the lump sum will get bigger just because you get older. Very important is the interest discount. At age 30 in the example, 2% interest would produce a $467 lump sum. And at 6% $122. The bigger the rate, the smaller the lump sum because interest helps an amount now grow bigger in the future. To complicate things, since 2008 the IRS bases lump sums on 3 different interest rates. The monthy annuity payments made within 5 years of the lump sum date use the 1st rate, past 5 and within 20 years use the 2nd rate, and past that use the 3rd rate. Since you are age 30, all of your monthly annuity payments would be made after 20 years, so that makes it simple since we'll only have to look at the 3rd rate. When you reach age 45 the 2nd rate will kick in. Here is the table of interest rates published by the IRS: http://www.irs.gov/Retirement-Plans/Minimum-Present-Value-Segment-Rates You'll find your rates above on the 2013 line for Aug-12. That means your lump sum is being made in 2013 and it is being based on the month August 2012. Most likely your plan will use the same rates for its entire plan year. But what is your plan year? If it is the calendar year, then you would have a 5 month lookback for the rates. But if is a September to August plan year with a 1 month lookback, the rates would have changed between August and September. Your August lump sum would be based on 4.52%, your September on would be based on 5.58% (see the All line for Aug-13). For comparison, a 30 year old with a $100 annuity payable at age 65 would have a lump sum value of $3,011 at 4.52%, but a lump sum value of $1,931 at 5.58%. The change in your accrued benefit by month will obviously have some impact on the lump sum value, but not as much as the change in interest rates if there is one. The amount they actually contribute to the plan has nothing to do with the value of the lump sum though. E&amp;P can be valid throug Net Present Value methods, on a field-by-field basis. As no field is ever-lasting, and there Are not an unlimited number of fields, perpetuity-formulaes Are shitty.  FCFF on a per-field basis with WC and Capex, with a definite lifetime.  Thank you for the compliment. I appreciate it. I didn't operate under selling the asset year five but other than that I followed this example. I appreciate the help. These assignments are just poorly laid out. Financial management also plays on different calculation interactions  so it is difficult for me to easily identify the intent at times. Thanks again. Both are correct depending on what you are really trying to evaluate. If you only want to understand how that particular investment you were taking money in and out of did by itself than you would ignore the cash.  You might use this if you were thinking of replacing that particular investment with another but keeping the in/out strategy. If you want to understand how the whole investment strategy worked (both the in/out motion and the choice of investment) than you would definitely want to include the cash component as that is necessary for the strategy and would be your final return if you implemented that strategy. As a side note, neither IRR or CAGR are not great ways to judge investment strategies as they have some odd timing issues and they don't take into account risk. The product you seek is called a fixed immediate annuity.  You also want to be clear it's inflation adjusted. In the US, the standard fixed annuity for a 40year old male (this is the lowest age I find on the site I use) has a 4.6% return. $6000/ yr means one would pay about $130,000 for this. The cost to include the inflation adder is about 50%, from what I recall. So close to $200,000.  This is an insurance product, by the way, and you need to contact a local provider to get a better quote.