Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
You are forgetting that there is not 100k for 10 years; only for one month. Then there is 99,9100 and so on. At 5 years, there is only 50K. So 1% doesn't give you 10k in interest; even the first year it would be less than 1k (not much less, but less). The declining balance almost halves the rate over the full period.
I did the calculations cited by johngolf using a spreadsheet but you can get the effective yield rate of an annuity with monthly payment (withdrawal) from this website
To get the interest for a certain term (duration), you enter a guestimate value to see whether you will get a zero balance at the end of the annuity term. If not, you adjust the interest rate number to get this zero balance.
For example, I enter a monthly withdrawal amount of $900 with a starting principal of $100K. A 1.57% rate will give you 0 balance at the 120th month or the end of 10 year.
If you enter 2% growth for the same starting principal and withdrawal amount, you will have $2469 at the 120th month and zero at 123rd month
etc.
P.S. I do not know all the details of the annuity in question but it is likely that it is a guaranteed 10 year term (i.e. payable to either the annuity holder or the beneficiary). A non-guaranteed policy has higher monthly payment than a guaranteed one.
You are forgetting that there is not 100k for 10 years; only for one month. Then there is 99,9100 and so on. At 5 years, there is only 50K. So 1% doesn't give you 10k in interest; even the first year it would be less than 1k (not much less, but less). The declining balance almost halves the rate over the full period.
the annuity should not work like that . it should be a combined payout of principal and interest at 900 a month , period . when you take an annuity product the payout should not be reduced because the balance is reduced .
all you need to know is you gave them 100k and at 900 a month got a total of 108k back 10 years later . in fact you can think of it as you give them 100k and they give you back your own money at the rate of 900 a month and in 111.11 months you got all your money back and are first going on their dime . you do not see a stitch of return until 9.26 years later
the annuity should not work like that . it should be a combined payout of principal and interest at 900 a month , period . when you take an annuity product the payout should not be reduced because the balance is reduced .
all you need to know is you gave them 100k and at 900 a month got 108k back 10 years later
I am talking about a fixed period immediate annuity; are you talking about something else? The payout is not reduced; it is fixed. But if you want to figure out the interest rate they are paying you, you should calculate what they are paying going forward on money that they have not given back. It isn't a savings account, but to compare it to one you need to work with interest on the declining balance. Otherwise I am not sure what value there is in the comparison.
it is the same as any annuity . you give them money for a period of time and in effect they are just handing you back the money you gave them , after they give you back all your money that is really the first penny of gain .
you give me 100k and i dole it out to you at 900 a month . you are seeing cash flow but no return until you go on my dime after you get all the money back you handed me .
the irs has them figure a certain amount as implied interest each year for tax purposes but in reality until you get your 100k back you have no roi and no money from the insurers pocket..
it is different then a cd where you give them 100k and they add to it with money out of their pocket day 1 .
Last edited by mathjak107; 05-07-2016 at 12:11 PM..
We are just looking at it differently. I just meant if you are going to compare it to a savings account and say "If I put the money in a savings account instead and started withdrawing the same amount they are going to pay me every month, how much interest does the savings account need to pay so I will run out of money at exactly the same time the annuity would pay out?". To answer that question I would have to use a declining balance. Then I would think of that as effective interest rate and see if it was less than I could get from a savings account that is actually being offered. If so, then it seems like the savings account is a better deal except maybe the tax man will mess that up. My money is all tax deferred. I can shift it into an annuity and only pay taxes as I am paid the income and keep the annual low enough that I don't pay much. I can't put it straight into a regular savings account and do that; I would have to declare it all as income the first year and get killed on taxes. I am not sure what kind of IRA options I would have for a simple interest account that would pay me like that - would it have disbursement fees every month? The more questions like this I ask, the more this option makes sense to me. But back to the main point - trying to do an apples to not-really-apples-but-almost between a fixed period annuity and a savings account I would need to use a declining balance.
It is a fixed period term immediate annuity with no risk. I am getting $108,000 for my deposit of $100,000. If I die before the ten years, my beneficiaries get the payments. And taxes are reduced on part of the annuity also. My income of $900 a month is fixed and will not vary. I did not pay my NYL agent anything for this annuity. If there were fees, I have no knowledge of this.
I think some of you are very confused about annuities. Sorry.
but that roi is very very low , in reality less then 1% , 108k in payments after 10 years . true it is on a declining balance but it is low just in general .
i double checked it against a ball park on immeadiate annuity.com and they show 917 a month so you are in the ball park .
you can't really compare it to a cd since a cd would not give you cash flow . you would have to ladder them and the shorter ones would pay near nothing and as you spent them you would get less and less each month so while the annuity is low there really is no other way to get guaranteed income flow that stays constand without spinning the wheel on your own investing .
Last edited by mathjak107; 05-07-2016 at 04:01 PM..
Problem with investments is you really need to know what you are doing. If you don't you can also lose.
Annuities have fees and all. The one thing they may provide though are riders for lifetime income.
these annuity's have no other fees , the rate you get like a cd already has the fees accounted for . these kind of annuity's are no different then buying a cd , if you like the rate that is the deal .
you can get them just for short term or for life . the life annuity's are where the bigger payouts are since those contain lots of mortality credits . those who die pay for those who live really boosting cash flow .
the short term stuff has none of that since everyone's heirs get the money if the annuity holder dies .
It is a fixed period term immediate annuity with no risk. I am getting $108,000 for my deposit of $100,000. If I die before the ten years, my beneficiaries get the payments. And taxes are reduced on part of the annuity also. My income of $900 a month is fixed and will not vary. I did not pay my NYL agent anything for this annuity. If there were fees, I have no knowledge of this.
I think some of you are very confused about annuities. Sorry.
You are the one who is confused. You are basically getting back all your principal over the course of 10 years - and left with zero in terms of the annuity at the end. You won't pay taxes on the return of principal - because it's a return of principal - not income.
The interest component on this annuity is 1.54%/year - less than the rate of return on a 10 year treasury note. You will pay taxes on the interest component (although - with an annuity - the taxes might not be paid out exactly the same way as with a bond investment).
Overall - if you want to spend $100k in principal over the course of 10 years - you will probably do it better this way than if you simply spend 10%/year and buy treasuries on your own (you might come out a couple of bucks ahead). But if you bought 3% 10 year brokered CDS - you'd probably do a fair amount better.
How old are you that you want to burn through your principal so fast? At my age - 68 - I am kind of warming up to the idea of spending down principal - but am not ready to pull the trigger yet. Robyn
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
