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here is a 5.50 % guaranteed return illustrated on the prudential defined income variable annuity.
see how you get your balance grown by 5.50% for every year you defer taking the annuity but if you decide to take it then by waiting you really only get 1/10% a year of that extra 5.50%. you can nevber take out that compounded amount they give you as asa cash or death benefit.
it only counts as a base amount to annuitize off of.
you will never see a spread sheet work up like this from the annuity company . this is the real deal right down to actual return on the right.
on the left you see the deferred mode where if you wait 10 years it grows at 5.50%. as you see for every year you wait you actually only see 1/10% a year of that new balance added to your pay check.
thanks. i am basically working from the most basic understanding of annuities here. i thought the 5-6% was basically the equivalent of 5-6% annual return on the initial investment. so in your spreadsheet, what is happening in the real world of a retired person using that money for income? they give the insurance company 100k and then what happens?
just the fact that i dont understand the product would keep me away from it. i think when my mom gets back from florida, ill have her register on the insurance company's web site so i can see the details regarding the product and maybe talk to a friend who is a financial advisor. the details on the ubs web site dont seem 100% complete (or maybe it is and i just dont understand it).
let me try to simplify the bulk of these products.
all the variable annuities can be very complex but most all kind of follow a certain path. they consists of two parts , a guaranteed growth rate and or minimum balance regardless of what markets do and they include an investment sub account you can choose funds to invest in. .
they offer you a guaranteed minimum growth rate on your balance when you are deferring income and letting it grow.
they apply this growth rate yearly to your balance but the deal is this virtual balance that is growing only has that balance if you use it to draw an income against it eventually. you do not get that growth as a cash value you can take and run.
then depending on the age you start drawing that income and whether married and passing to a spouse you get a different withdrawal rate for life off that balance.
it can range from 4% for a single a year at age 55 to 5% at age 65 as examples.
so if you put 100k in at age 55 and let it grow until age 65 the guaranteed growth rate in the prudential one is 5.50%. the money they gave you during that time frame left you with a balance of 180,000 so would get 5% a year of 180k.
when you hear about these high growth rates folks claim they are getting this is what they are actually getting , a virtual balance for annuitizing a tiny piece of tht balance not a cash balance that is ever theirs to take and cash out.
that is the first part of the equation and the most likely part to play out in most cases because the other part of the variable annuity typically includes some investments.
the deal is that you usually will lock in your income base on the higher of the two when you are ready to draw an income.
if the 180k from the guaranteed growth was higher than the variable account than that becomes your base. if your investment balance was higher than the investment balance becomes your base.
but it is on the variable part that the fees take their toll not the guaranteed part. also any market investments do not include dividends.
dividends account for 1/3 the markets gains so lets say if markets averaged 9% you would see 6% as an average return . subtract out 2-3% in fees a year and there really is no way your variable part will beat the guaranteed part for most owners.
always study the minimum guarantee part and assume that will be what you get and forget those lovely projections on the variable part they usually show..
many like the prudential are actually not bad if you compare them to spending down cash and bonds in a diversified portfolio and view them as bonds on steroids so to speak because of the larger cash flow they provide.
if you bought them as a proxy for real investing odds are you will be left way behind because of the fees and lack of dividends.
whether good or bad is going to depend on those guarantees as more than likely that will be what you end up basing your income on ..
the differences you will find is what happens to the money if you die while in the deferred mode as well as what happens if you die in the annuitized mode.
that is usually a big area of difference and costs.
Last edited by mathjak107; 04-07-2015 at 03:58 AM..
thanks a lot for that explanation. im a little more clear. tonight ill look back at her annuity information and maybe ill understand those numbers a little better.
when i looked at her 2014 annual statement, she overall had about a 3% return and about 2.25% of that was accruals from annuities. her dividends made up about 2.5% and then her capital gains were -1.7%. so on the non-annuity portion of her portfolio, you are looking at a .8% return for 2014. i think i should be able to do better than that. i need to get access to her statements prior to her move to ubs so i can check her annual return history.
I am reviewing these prospectuses for the annuities my mom has. im looking through the expenses of the annuities in their fee table with riders and the example of your cost on a $10k investment that they offer for both. maybe I am not understanding it but im starting to have a heart attack and anger is developing. am I missing something? should I be furious that my mother has been advised to sink a large chunk of her money into these things?
the prospectus is a lot but they do have a fee table starting page 14 and on page 16 there is an example of how much fees you may pay if you basically pay the maximum possible fees on the contract with a $10,000 investment. im not sure if this example even include the expenses of the underlying investments the money is in.
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