{"id":23235,"date":"2014-11-06T08:01:00","date_gmt":"2014-11-06T08:01:00","guid":{"rendered":"https:\/\/www.annuityfyi.com\/?page_id=23235"},"modified":"2022-12-16T15:49:26","modified_gmt":"2022-12-16T15:49:26","slug":"payout-rates","status":"publish","type":"page","link":"https:\/\/www.annuityfyi.com\/warnings\/payout-rates\/","title":{"rendered":"Annuity FYI Warning #8: Immediate Annuity Payout Rates Aren\u2019t What They Seem!"},"content":{"rendered":"
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A lot of companies and websites advertise immediate annuities<\/a> and post enticingly high \u201cpayout rates.\u201d For example, as of this writing I am seeing advertised on the Internet immediate annuity payout rates as high as 20%. Who wouldn\u2019t be attracted to this when 1-year certificates of deposit (CDs) are paying currently 1% or less? Well, you shouldn\u2019t be! Beware, payout rates are misleading and should be ignored when considering immediate annuities. Pay attention instead to how much monthly or annual income you will receive, and what the timeframe guarantee is. Let\u2019s explore why.<\/p>\n\n\n\n

Example \u2013 Period Certain Immediate Annuity<\/strong><\/h4>\n\n\n\n

First, let\u2019s look at what is the payout rate and how it\u2019s different than the interest rate that most of us commonly think of with a period certain annuity (this is an annuity that guarantees fixed payments for a fixed period of time). I am looking at a 5-year period certain immediate annuity on the Internet now. It says that for a 65-year old man investing $100,000, he (or his beneficiaries) will receive $1,680 per month for 5 years. It also says that the payout rate is 20%. Sounds great! No, it isn\u2019t! Here\u2019s why. $1,680 per month = $20,160 per year. The annual payout rate is the amount paid per year divided by the initial investment, or $20,160 \/ $100,000 = 20.16%. But wait, what does this really mean? Nothing! Just a useless calculation designed to confuse investors. Because what we commonly think of as an interest rate, or rate of return, is in this case 0.3% per year! (This is using the time value of money equation). In comparison, at the time of this writing a 5-year CD has a rate of return of about 2% per year. If you are being presented with a period certain annuity, ignore the payout rate and calculate, or ask your advisor or agent to calculate for you, the rate of return. This way you can compare it easily to other investments like CDs and fixed annuities. Apples to apples, not apples to oranges!<\/p>\n\n\n\n

Example \u2013 Lifetime Immediate Annuity<\/strong><\/h4>\n\n\n\n

Let\u2019s look at another example with a lifetime immediate annuity \u2013 an annuity that guarantees you a set monthly or annual payment for as long as you live. As of this writing, a 65-year old man investing $100,000 into a lifetime immediate annuity that guarantees 5 years to beneficiaries will pay about $7,000 per year for as long as this man lives. So, you will see a payout rate advertised of $7,000 \/ $100,000 = 7%. What does this mean? Nothing! Again, it is just designed to confuse you into thinking this is a 7% interest rate, which it is not. What\u2019s the real rate of return? Well, that depends how long he lives. We know that at a minimum, if he dies anytime during the first 5 years, he will receive $7,000 x 5 years = $35,000. So he will have received a highly negative rate of return on his $100,000 investment. That\u2019s a big difference \u2014 7% payout rate vs. a negative rate of return. On the other hand, if he lives to be 90, he will have received $7,000 x 25 years = $175,000. This computes to an interest rate, or rate of return, of 4.87%.<\/p>\n\n\n\n

Don\u2019t Let Payout Rates Confuse You \u2013
Focus Instead on the Three Ways Immediate Annuities Can Protect You<\/strong><\/h4>\n\n\n\n

Our simple advice \u2013 ignore the payout rate when considering an immediate annuity. It is only designed to confuse you. Pay attention instead to how much monthly or annual income you will receive, and what the timeframe guarantee is. Remember, an annuity can protect us against essentially three important risks: longevity risk \u2014 the risk of living longer than our life expectancy; market risk \u2014 the risk that our income will fall if stock prices or interest rates go down; and what we might call judgment risk \u2014 which is the risk that we, ourselves, might do something stupid to harm the lifetime income stream on which we depend.<\/p>\n\n\n\n

Annuities makes sense if your risk profile is that you would rather have a higher consistent pay out and put the risk of living longer than your life expectancy on the insurance company. One of our clients shared with us his viewpoint, which we thought was instructive: \u201cIf all I really want from my million dollars is $80,000 a year for the rest of my life, then do I really care if I get my $80,000 a year for three years and then die? True, it\u2019s a net gain for the insurance company, but was it really a loss for me personally? I\u2019m dead, so it isn\u2019t like I\u2019m going to miss the money. And I could choose an option to return the remainder to my heirs. Alternately, I could try and manage the money myself, which requires a lot of time, education, and energy, but without guaranteed lifetime income, I\u2019m in a much worse position than I would have been with the annuity.\u201d<\/p>\n\n\n\n

For more information about the product mentioned in this article contact us here:<\/strong><\/a><\/a><\/p>\n\n<\/div><\/div>\n\n

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<\/path><\/svg><\/span>Related Content<\/span><\/h2>\n\n\n\n
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Immediate Annuity Rates<\/a><\/h3>\n<\/div>\n\n\n\n
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Annuity Warnings<\/a><\/h3>\n<\/div>\n\n\n\n
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Are AARP’s Immediate Annuity Rates Competitive?<\/a><\/h3>\n<\/div>\n<\/div>\n\n<\/div><\/div>\n<\/div><\/div>","protected":false},"excerpt":{"rendered":"

A lot of companies and websites advertise immediate annuities and post enticingly high \u201cpayout rates.\u201d For example, as of this writing I am seeing advertised on the Internet immediate annuity payout rates as high as 20%. Who wouldn\u2019t be attracted to this when 1-year certificates of deposit … <\/p>\n

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