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No you cannot make your own "annuity" for several reasons:
Annuities are based on having many thousands of people give their money to the insurance company to invest and set the payout rate to each person based on their age and gender (men die earlier). These many thousands of people have a bell-curve average of death date, some will die at earlier ages, some will die at older ages.
Annuities pay (in general) a higher annual percentage rate of payout than you can pay yourself with your own funds. Meaning that if you paid yourself the same amount that the annuity pays it's likely your money will run out before you die, unless you die prematurely.
Example: an annuity pays you 6% of the money you gave them every year whereas you (an individual) could probably only pay yourself 4% before you'd run out of money, (an individual could run out of money at 4% payout, an annuity would not run out of money).
The first 17 years an annuity pays you it is actually using your own money to pay you. Only after that 17 year period (while it has your money invested) does it start using other money to pay you.
Immediate annuities have their place but in my opinion are best used for people who need protection in case of worst case happening. Also do not give any single annuity company more money than you are insured for by the state you live in. Most times it's $250,000 per company per person. Do your research before handing over money.
Last edited by twinkletwinkle22; 02-15-2024 at 01:47 PM..
Now if 5% were the normal rate for CD's then I wouldn't even need an annuity because I could draw the interest indefinitely and preserve the principle for my wife when I'm gone. But when bank interest rates start to fall so will annuity rates.
A Treasury bond maturing in 20-30 years yields about 4.5%. They were yielding a little over 5% last fall. You can follow interest rates here...
Another thought is to buy an SPIA and a Treasury bond. As I mentioned above, long Treasuries yield about 4.5% today. An SPIA to cover two 65-year-olds will pay about 6.5% annually. That annuity will continue to make payments until both of you have passed. To get a 5% annual draw you'd put one-fourth of the money in an SPIA and the rest into a Treasury bond. The bond interest plus the annuity payments will give the income level you're looking for. When the bond eventually matures you'll be at the mercy of reinvesting at whatever the going rate is at the time, but that can be up to 30 years in the future.
That's very simple, less work than building a ladder of CDs or bonds. Of course the SPIA payment will be less if the two of you are younger than 65, or more if you're older than 65. An any rate, hopefully the idea makes sense.
There remains the question of dealing with cost of living increases, but since you did not bring it up I hope you have something in mind?
No you cannot make your own "annuity" for several reasons:
Annuities are based on having many thousands of people give their money to the insurance company to invest and set the payout rate to each person based on their age and gender (men die earlier). These many thousands of people have a bell-curve average of death date, some will die at earlier ages, some will die at older ages.
Annuities pay (in general) a higher annual percentage rate of payout than you can pay yourself with your own funds. Meaning that if you paid yourself the same amount that the annuity pays it's likely your money will run out before you die, unless you die prematurely.
Example: an annuity pays you 6% of the money you gave them every year whereas you (an individual) could probably only pay yourself 4% before you'd run out of money, (an individual could run out of money at 4% payout, an annuity would not run out of money).
The first 17 years an annuity pays you it is actually using your own money to pay you. Only after that 17 year period (while it has your money invested) does it start using other money to pay you.
Immediate annuities have their place but in my opinion are best used for people who need protection in case of worst case happening. Also do not give any single annuity company more money than you are insured for by the state you live in. Most times it's $250,000 per company per person. Do your research before handing over money.
period certain annuities are not life annuities..they are like cds that work in reverse.
they pay you back principal and interest over the specified period and it ends …there are no mortality credits so the payouts are near cd levels not spia life annuity levels
No you cannot make your own "annuity" for several reasons:
Annuities are based on having many thousands of people give their money to the insurance company to invest and set the payout rate to each person based on their age and gender (men die earlier). These many thousands of people have a bell-curve average of death date, some will die at earlier ages, some will die at older ages.
Annuities pay (in general) a higher annual percentage rate of payout than you can pay yourself with your own funds. Meaning that if you paid yourself the same amount that the annuity pays it's likely your money will run out before you die, unless you die prematurely.
Example: an annuity pays you 6% of the money you gave them every year whereas you (an individual) could probably only pay yourself 4% before you'd run out of money, (an individual could run out of money at 4% payout, an annuity would not run out of money).
The first 17 years an annuity pays you it is actually using your own money to pay you. Only after that 17 year period (while it has your money invested) does it start using other money to pay you.
Immediate annuities have their place but in my opinion are best used for people who need protection in case of worst case happening. Also do not give any single annuity company more money than you are insured for by the state you live in. Most times it's $250,000 per company per person. Do your research before handing over money.
Thank you for the helpful info. Annuities as many here have pointed out are extremely complex instruments. From what you point out
"The first 17 years an annuity pays you it is actually using your own money to pay you."
to what mathjack points out:
"period certain annuities are not life annuities..they are like cds that work in reverse."
to what hikernut points out
"To get a 5% annual draw you'd put one-fourth of the money in an SPIA and the rest into a Treasury bond."
Clearly these things are not for the unsophisticated. For example, using the calculator I linked in post #9
$500,000 in a CD for 20 years at 5% yields $25,000 in interest only for on year. Over a period of 20 years that works out to $500,000 in interest only, incredibly my principle amount. And I still have that original $500,000 at the end of the 20 years.
Contrast that with a 20 year annuity at the same amount for the same period:
Result
You can withdraw $3,269.18 monthly.
Total of 240 payments: $784,603.76 Total interest/return: $284,603.76
For the annuity I only get back $284,000 over that 20 year period and the total of all the payments with my principle figured in is only $784,000 instead of $1,000,000 with the CD. I struggle to understand why people invest in annuities and clearly as a few of you pointed out they are for some people in certain situations but not good for everyone.
The ladder can be built however a person chooses, giving level payments, escalating payments, or anything else. The ladder will generate more interest in the early years of course, so the tax bill will start out high and end at almost nothing. So that's something to keep in mind if choosing the ladder.
I'm like the OP, I don't want an insurance company in the loop unless it's necessary.
You probably can't do an annuity like without an insurance company. In a CD with 2.5% coupon that is all you get. Unless you do 5 year ladder where 1 CD matures every year may be only way to go. May be best to only do 5 years at a time anyway as interest rates change.
For the annuity I only get back $284,000 over that 20 year period and the total of all the payments with my principle figured in is only $784,000 instead of $1,000,000 with the CD. I struggle to understand why people invest in annuities and clearly as a few of you pointed out they are for some people in certain situations but not good for everyone.
In your CD illustration you’re not taking any money out. If you made periodic withdrawals the total amount of interest would be much less than $500,000.
In your CD illustration you’re not taking any money out. If you made periodic withdrawals the total amount of interest would be much less than $500,000.
That's true. The hard and fast rule about the two is that with a CD your take-out is always going to be less because you are only drawing out the interest and preserving the principle whereas with an annuity the take-out is a combination of principle AND interest. What it looks like to me is that on paper dollar-wise a person is much further ahead with CD's than with annuities. That would stand to reason because otherwise why would insurance co's be pushing annuities so heavily except that they are making a financial killing on them? The general rule is that if it's good for the insurance company, it's not so good for the investor. I'm wary of annuities because I know that if insurance co's love them so much there has to be something wrong with them from the investor's point of view. And as mathjack I think it was pointed out, in the extreme long run a life annuity can be a great thing if the person has the extreme good fortune to live well beyond the annuity's period of insurance. With many annuities, if the annuitant dies during the contract the insurance co. keeps the balance and the families lose out. But certain annuities allow for the payments to pass to the beneficiaries, but the downside to that is the monthly pay-outs are much less. General rule of thumb: the more the insurance co gives up the less the monthly payments are.
Some might wonder why I am agonizing with all this. I'll explain. My wife loves to travel and she's going to outlive me by a few decades anyway. She has her own money, roughly about the same amount as I do but I am terrified she's going to lose control and spend it all on traveling for herself and her sister and not have anything left when she's old--she's 68 now. I am 73 and not in great health. I want something in place that she cannot touch so that when I am gone the monthly payments will continue for her unabated so that she ends up with a stable monthly income that she cannot spend on traveling--she'd be cruising full time if she could and seems to be oblivious to the fact that $200,000 annually for cruising costs is not sustainable.
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