Annuity Rates update April 2012
Immediate Annuity Rates
This post will update annuity rates for immediate annuities. First a quick review of immediate annuities and exactly what they do.
An immediate annuity is a single deposit by the investor with an insurance company in return for monthly payments for a period of time. That period of time can be anywhere from five years to life. Although I’ve not seen statistics on this, I believe most people take the lifetime option as this is the most attractive feature of immediate annuities. They can act like a second Social Security check, providing a payment for life that you cannot outlive.
The first question an investor may have is what are the annuities rates I can get. But this question assumes you can compare the annuity rate to other investments, which you cannot.
When investors, economists and accountants analyze an investment, they calculate the internal rate of return. The internal rate of return on an immediate annuities is terrible, about 1% annually. What person in their right mind would make a investment lasting 20 or 30 years at 1%? The annuity rates on immediate annuities will always pale when analyzed against other investments on an internal rate of return basis.
That’s because the other factor, a qualitative and not quantitative factor, the fact that you cannot outlive the payments, does not get included in an internal rate of return calculation. To say this in another way, it means that the immediate annuity provides an insurance aspect that other investments don’t. Not only can immediate annuities provide the aforementioned insurance aspect of providing payments you cannot outlive, they provide the highest possible safe cash flow of any investment you can make.
What I mean by that is for a given amount of investment, say one hundred thousand dollars, you will get more income per month, guaranteed, then any other investment you can make. For example, a 70 year-old-male investing $100,000 will get $648 monthly for life, equal to a 7.7% cash return on his money. Now remember, that when he die,s will be nothing left unlike other investments such as stocks or mutual funds, which will have some balance in an account to pass on to beneficiaries. In the case of the immediate annuity, our investor receives a very attractive cash flow during his lifetime but nothing is left for the beneficiaries, resulting in that very poor internal rate of return calculation previously discussed. Therefore, while interest rates are generally low in the economy care late, an investor can still achieve a very attractive cash flow rate of return on their money.
As mentioned in previous posts about immediate annuities, the older the investor, the higher the rate of payments. Generally it does not pay for somebody younger than age 65 to consider immediate annuities because the cash flow rate of return will not be sufficiently high to justify them.
Because the internal rate of return, the annuity rate, is so low on immediate annuities, insurance companies will not disclose them. What they quote you is the monthly payment you will receive for a given investment.