The time value of money essentially refers to the fact that it is often better to have money in hand today, as opposed to money promised to a person to be paid at a later date and time; by having it promised, but not yet available, the individual is missing out on the different items that the money could be applied toward (Time Value of Money, 2013). If, for example, a person had loaned their friend $50 to pay off their cable bill to keep their internet on, with the promise that they would be paid back once the friend got paid in a week and a half, the opportunity cost of the time value of the $50 would be all of the different items that the $50 could have been used for in the interim plus the $50 (Henderson, 2013). The $50 could have paid for a date night – dinner and movie – or it could have been utilized to buy books, groceries, or pay off a bill early; the possibilities are endless.
Annuities are still somewhat controversial when it comes to retirement planning, due to the high fees and the fact that their payoffs may not be as high as other potential investments; however there are many retirement specialists who recommend individuals opt for annuities when planning their retirement due to the fact that they assist individuals in ensuring that they will not outlive their available income (Pavia, 2013). A situation wherein an individual may use an annuity for their retirement planning would be in today’s society in our current economy. Due to the fluctuations in the market in the past few years, an annuity would be the perfect method of retirement planning for an individual as it offers a guaranteed income payout on a future date and time, and the individual is able to determine how long those payments are received and even the type of annuity that they wish to select (fixed or variable) in order to determine whether they will have a stable amount of income or wish to take the chance on a potentially higher payout (What is an annuity?, 2013). In this manner, an annuity may be used as a viable form of retirement planning.
- CNN Money. (2013). What is an annuity?. [online] Retrieved from: http://money.cnn.com/retirement/guide/annuities_basics.moneymag/ [Accessed: 31 Jan 2014].
- Econedlink.org. (2013). Time value of money. [online] Retrieved from: http://www.econedlink.org/lessons/index.php?lid=37&type=educator [Accessed: 31 Jan 2014].
- Henderson, D. (2013). Opportunity cost: the concise encyclopedia of economics | library of economics and liberty. [online] Retrieved from: http://www.econlib.org/library/Enc/OpportunityCost.html [Accessed: 31 Jan 2014].
- Pavia, J. (2013). Do annuities fit in a retirement plan?. [online] Retrieved from: http://www.cnbc.com/id/101068618 [Accessed: 31 Jan 2014].