The March 4, 2013, issue of Forbes covers the theme, "Retire Rich." We’d all like to do that. The question is, how? One of the articles had a title that sent me to my dictionary. It was called "Think Tontine." Here is what I found when I looked up the definition.
Author William Baldwin opened his article asking, “Would you be interested in a strategy that yields 10% or better annual payout during retirement?” In a zero interest rate world that might appear to be an impossible to attain goal.
Baldwin explained the idea of a deferred annuity. One of his examples showed figures attainable by putting up a lump sum at age 60 while waiting to take any distributions until 10 years later.
These annuities are not tontines. Buyers will be paid set monthly amounts for life beginning at the selected age rather than having simply the last sole survivor getting the whole pile of money.
The double-digit numbers listed in the Forbes article suggest really good percentage returns based on the initial lump-sum payment.
After checking out the deferred annuity’s details, things don’t look nearly as positive. Here are the promises for that, "Buy annuity at 60, start collecting income at 70" example. Note: Women would receive less per month than men due to their longer average life expectancies.
Deferred annuity buyers would have received less than their original lump sum contributions over the first 17.8 to 18.6 years after purchase. Those numbers are based on an original $100,000 lump-sum purchase with all income deferred over the full decade from age 60 to age 70.
At first glance it would appear that people living past 78 years would start to "win" by getting back more than they put into their lump-sum purchase price. That is nominally correct but it represents a 0% rate of return over about the first 18-year holding period.
Had you not forked over your money to an insurance company it certainly would have been earning something during the "deferred" decade.
Here is what $100,000 would have grown to at reasonable-to-imagine average annual returns.
Those who bought annuities would have forfeited any ability to leave any of their $100,000 and/or future earnings on it to a spouse, other heirs or charity. They would likely have been able to accumulate significantly larger nest eggs (by age 70) to draw on for monthly income than the ultra-conservative insurance provider was guaranteeing.
Barring disastrous results, people would likely have more absolute dollars, increased flexibility and higher monthly income possibilities by simply investing on their own than from the purchase of the deferred annuity.
The $270,704 that would have come from a 10% annual rate of return represents more than 21 years of $1,071 monthly payments. That would come simply by gradually withdrawing principal. It would not be exhausted to beyond above age 91 assuming absolutely no dividends or growth in the 21 years after payments from the account began.
Even the $200,966 from 7% annualized total returns would provide the same monthly check as the annuity promised men up to age 85.6 That once again assumes no earnings at all over the almost 16 years from 70 to almost age 86.
Women would fare even better than what was described above as their guaranteed monthly payouts were lower to begin with.
In most cases there will be a nice chunk of change left over to pass on via your estate. Anyone unlucky enough to drop dead shortly after committing to a lifetime annuities would have lost big time. Whatever hadn’t been paid out already (of their original $100,000) would be forfeited to the insurers.
There is no free lunch. Annuity commissions are among the highest YTB (yield to brokers). They are sold aggressively by financial advisers. Be aware of the facts before you sign on the bottom line.
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