For example, for a 57 yo in my state, the premiums for a single life male, single life female, joint life and 25 year certain annuity would be as shown in the table below according to immediate annuities.com. The IRR implicit in the 25 year payout annuity is 2.96%. If I assume that is the interest rate that the insurer uses for annuities of that general term, I can calculate the number of periods implicit in the premiums for the other annuities, add 57 and get the age at which I need to live to gain from the mortality credit. If I die prior to that age then the insurer comes out ahead, if I outlive that age then I come out ahead (in both cases assuming that 2.96% is a reasonable interest rate assumption for an annuity that will last ~25 years on average).
I think this makes sense. Thoughts?
"If I die prior to that age then the insurer comes out ahead"
Not really, if you study the details of the contract. If it is for a defined term, and you opt for the residual being passed on to another (or your estate), that's not the case.
I just bring this up since so many people have the idea that if you die and have an SPIA, the remainder goes to the insurance company. That is only a fact if you chose to take that option (to maximize your monthly payout/income), but in reality - as in all insurance products, you make the decisions to both provide current income, along with distribution of the remainder if you pass at an earlier age than expected.
For instance, in early/mid-2007 I contracted for an SPIA for life, along with a rider for a guaranteed period, along with my DW as getting payments (at 100%) if I passed earlier than expected. I/we also opted for 100% payments to our estate if we both passed before the estimated joint life period (28 years, at contract execution). And if one/both lives longer than that calculated 28 years? Payments continue - at 100%, until we're both gone.
It's simple to calculate a rate (regardless of what is shown on any site), by creating an IRR (not XIRR) worksheet, using the preimum, monthly payout, guaranteed period, and extended non-guaranteed period (for us, calculated to age 100), to see what your actual return is.
In our case, our contract is providing a return (for the 28 year guaranteed period) of just under 5%. If we would have gone for a policy that would not have a guaranteed period, no coverage of spouse, and no payments to our estate if we passed earlier than calculate lifespan, we would have received close to a +1% "bump" in return, and a much greater monthly payout.
Is it worth that 1%? Only the contract holder (you) can make that decision. Just a small point; if either/both continue to live and receive monthly benefits after the calculated joint lifespan, the actual IRR (return) will increase overall. Heck, it might even get to 6% if we live long enough.
That's the exercise that I/we went through over five years ago when we executed our contract, to compute the various quotes we received, along with the defined options (not all insurance companies provide the same available benefits) in order to provide us information to make an informed decision on the product.
You can't just look at one web site and see what the current payout is. You need to compare policies/companies, on options that
you requrire.
Any other comparision is just "spitting in the wind", IMHO.
As far as your comment,
"2.96% is a reasonable interest rate assumption for an annuity that will last ~25 years on average"?
That's a personal call. If your retirement income plan can work with the income generated (regardless of perceived rate of return)? IMHO, that's all that counts. Heck, those folks that still have their WIN (whip inflation, now) buttons from decades ago would think that I/DW would be satisified with a 5% return rate are crazy. Of course, back in those days, CD's were paying 20% - and mortgages/notes for homes were just above those rates.
It dosen't matter what the world is doing. It does matter that you are able to keep your head above water, regardless...
Well, you did ask for our thoughts on the matter
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