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Originally Posted by SecondCor521
John,
Just for kicks I plugged your numbers into Excel a slightly different way.* What I did was take $250,000 as an initial payment, then figured one year from now you'd get $11,000, then the next year you'd get 1.03 * $11,000, etc. and that you'd receive 37 payments.* This works out to a rate of return of 5.73% using the IRR function.* However, according to the IRS (Pub 590 table 1), the life expectancy for a 53 year old is 31.4 years.* Reducing the number of payments in Excel to 31 gives an IRR of 4.91%.* According to http://www.kansascity.com/mld/kansas...s/15500747.htm, the 30 year Treasury rate is yielding 4.90%.* Vanguard can probably create an asset allocation that pays better than that, so they come out ahead on average.
The big thing you're not thinking about is these rates are decent rates if you think of it like a CD or a long-term bond.* However, the difference between a CD/bond and the annuity is that at the end of the period in a CD, you get your $250K back; in the annuity case you just made a $250K donation to Vanguard.* The question to you then is, do you care if whomever is to receive your inheritance/estate gets $250K less if you go the annuity route?
2Cor521 |
Now I AM confused.* *I'm not sure exactly what IRR is doing.* *But if I change
MY spreadsheet so that there's $250K left in the hypothetical account after the
37 payments (that began at $11465 and increased at 3% per year), then the
rate would have to be about 6.85%.* In other words, that's what Vanguard,
(or whoever) would have to earn on my premium to make those payments to
me and return my $250K.* (But of course* they're NOT returning the $250K).
Fascinatingly, that's less than a point more than the 6.2% the premium would
have to earn to make the graded payments but return nothing after 37yrs !* So
returning the principal doesn't represent that much add'l effective ROR, oddly.
The point is well-taken that the effective ROR is a lot less if I only live to 78yo
or 81yo or whatever.* *But, as I said, it makes sense for me to design the plan
to the most problematic reasonable scenario, the one where I live to the 90%
percentile of life expectancy (which is about 37 add'l years for a 53yo, according
to the table in Greaney's "How much can you safely withdraw" paper).
John