Gray Girlfriend's Guide to Divorce

An Annuity, in Pie-Talk

Bake a Pie
by Amy Lawson, MBA, CDFA®

What is an Annuity?

I recently published a blog entitled, “Annuities & The Honda Accord:  They’ve Come a Long Way, Baby!”  While the feedback has been overwhelmingly positive, my friend, Caitlin Kline, pointed out something I hadn’t considered, something very important.  Specifically, Caitlin pointed out that while I may be able to talk about annuities in my sleep, not everyone knows what annuities are or how they work. 

Caitlin, a therapist, filled with insight of the minds of humankind, kindly pointed out that many of my readers may not feel comfortable posting the fact that they don’t actually know what an annuity is. 

So, dear friend, let’s revisit annuities, taking a colloquial approach. 

An Annuity is A Like a Pie

Think of an annuity as a pie, albeit, a strange pie; a pie you make and bake in stages.  Instead of measuring the stages in minutes, the stages are measured in years. 

To make this strange pie, you mix some ingredients, then bake it for a while.  Then you add more ingredients, then bake it a while longer.  Then you add even more ingredients, then bake even longer.  Add. Bake. Add. Bake. Repeat. 

This strange pie has a minimal amount of time it MUST bake, but after that amount of time has passed, your pie is ready to be enjoyed.  No matter how long the pie bakes after the minimum baking time, you can not overbake the pie.  

As it bakes over time, the pie gets larger.  How much larger depends on how well the oven works.  If the oven temperate is consistently accurate, then your pie will consistently increase in size.  If the oven temperate is erratic, then at the end of some stages the pie will be larger than the stage before it, while at other times the pie will not have changed in size at all.  NOTE: At the end of each period, the pie will either be larger than the previous period or will be the same size, but it will not shrink in size.

At the end of the minimum baking period, you can enjoy the entire pie all at once or you can request a slice of pie each month, quarter, or year for the rest of your life.   Any unconsumed portion of this pie goes back into the oven, potentially growing larger over time.  In between servings, the size of the unconsumed portion of your pie can grow or stay the same depending on how well the oven works.

Because no one bakes for free, there are two costs involved. 

Annuity Costs

The first is a pie tax.  You don’t pay tax on your pie during its minimum baking time, but you will have to fill the tax man’s pie hole when you start enjoying the pie.  Remember:  As long as the pie stays in the oven, you don’t have to fill the tax man’s pie hole.

The second is a pie penalty.  If you remove your pie from the oven before the minimum baking time is completed, not only do you pay the pie tax, but you must also fill the tax man’s pie hole with an extra 10% slice of pie. 

That’s a lot of pie to lose to the tax man!

Other Annuity Considerations

Should you die before the end of the minimum baking period, your beneficiaries will receive the pie, either the whole pie or a slice every month, quarter, or year until they die.  They, too, must fill the tax man’s pie hole when they receive pie. 

Should you become unable to bake before the minimum baking time period is completed, you may be allowed to enjoy your pie without the pie penalty, but you will still need to fill the tax man’s pie hole.  (Have you noticed that the tax man’s pie hole always gets filled?)

Under what circumstance might you take your pie from the oven before the minimum baking time is completed?  Because the minimum baking time is measured in years, should you miscalculate your food needs during those years and end up with a bare cupboard while your pie is baking, then you may need to eat your pie before you intended to do so. 

All Puns And Pies Aside…

An annuity is an insurance contract between you and an insurance company where you agree to pay the insurance company X dollars, either in a lump sum or on a set schedule for X years, and after that period of time, the insurance company agrees to pay you X dollars plus interest on those dollars, either in a lump sum or on a set schedule for X years.  In a nutshell, you are buying a future income stream. 

Want to learn more?  About annuities, not baking – I’m a Ghiradelli box brownie girl, myself.  Reach out, we can show you if an annuity is right for you and if so, which one is best for you.

Wishing you peace and plenty of pie!

Your gray girlfriend, 


About the Author

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Amy Lawson, MBA, CDFA®

As a divorced baby boomer, Amy, an independent investment advisor since 2001, formally expanded her services in 2016 to help older women navigate the daunting financial minefield of divorce after meeting numerous smart, well-educated, divorced women who lacked the funds to secure their financial futures.  She understands that for older women facing divorce, achieving an equitable divorce settlement is the first step.

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