Opinions on this little analysis I did

[cashflo2u2]

I'm trying to compare a standard SPIA and an inflation adjusted SPIA. Maybe this is a little primitive but here is what I did:

I got a quote for an SPIA both with and without a CPI inflation rider.

I took the annual SPIA payment without the inflation protection (say $12,000) and assumed an annual inflation rate, e.g., 4%. I then took the reciprocal of that figure, in this case 96%. To arrive at each current year’s real (inflation adjusted) annuity payment I multiplied the previous year’s payment by the reciprocal amount and went out for 20 years.

Then I took the inflation premium (say $39,000) and assumed it was invested in an interest bearing account at an assumed rate, say 3%. Then, for each year I applied the following formula to the beginning balance of the account (beginning balance minus the amount to bring the annuity payment back up to the original amount, times the interest income rate, in this case 1.03%). I then ran that out for 20 years.

In my calculation the premium account went negative in the 16th year and the account balance equaled the original premium in about 41/2 years after rising in the first few years. Is this a proper way of doing it and is the break even point considered at 4 ½ years when is equaled the premium or the 16th year when it ran out?

Is there a website that would do this for me? TIA for any comments.

 

[RockOn]

I'm trying to compare a standard SPIA and an inflation adjusted SPIA. Maybe this is a little primitive but here is what I did:

I got a quote for an SPIA both with and without a CPI inflation rider.

I took the annual SPIA payment without the inflation protection (say $12,000) and assumed an annual inflation rate, e.g., 4%. I then took the reciprocal of that figure, in this case 96%. To arrive at each current year’s real (inflation adjusted) annuity payment I multiplied the previous year’s payment by the reciprocal amount and went out for 20 years.

Then I took the inflation premium (say $39,000) and assumed it was invested in an interest bearing account at an assumed rate, say 3%. Then, for each year I applied the following formula to the beginning balance of the account (beginning balance minus the amount to bring the annuity payment back up to the original amount, times the interest income rate, in this case 1.03%). I then ran that out for 20 years.

In my calculation the premium account went negative in the 16th year and the account balance equaled the original premium in about 41/2 years after rising in the first few years. Is this a proper way of doing it and is the break even point considered at 4 ½ years when is equaled the premium or the 16th year when it ran out?

Is there a website that would do this for me? TIA for any comments.

What are you really trying to figure out? A cash flow calculation for your expected lifetime (or chosen payment period) is likely the best way to compare the two. You can come up with an IRR (internal rate of return) for both, the higher IRR the better the investment.

Without doing it, the result will be the longer you think you will live, the better the CPI adjusted choice will look. Also the longer you live, the better choosing an annuity investment looks in general.