When you invest in a fund with the intent of delaying payout and then, once the payout begins it continues for the rest of your life, it is called a Delayed Perpetuity. There are some types of investments that are commonly valued using a perpetuity formula; for example, preferred fixed dividend paying shares are valued in this way. If said dividends don’t start paying out for several years, rather than right away, the cash flow generated would be considered a delayed perpetuity.
It is easier to think of a delayed perpetuity in the following terms: you get X dollars each year for the rest of your life starting X years from now. The formula for finding the current value of a delayed perpetuity is:
- PV is the present value of the delayed perpetuity
- r is the opportunity cost of capital
- t is the number of years the payout is delayed prior to the initial payment
Many retirement products are set up as a delayed perpetuity. The advantage of a perpetuity is that you will continue to receive your payments for as long as you live. As long as you don’t need the funds in the next few years, and you have other sources of income which can be used in emergencies, a delayed perpetuity can be a good choice.
The main difference between a delayed perpetuity and a regular one is the fact that the net present value of the delayed perpetuity is lower. This is because, based upon the time value of money principles, payments have to be discounted as an accommodation to the delay.