Traditional vs charitable annuities

That's not quite how annuities work.

A charitable annuity funded from an IRA would have to pay taxes on the withdrawal from the IRA.

An immediate annuity for a 70 year old would pay about 8.6%, but a charitable annuity would be 5.7%.

Don't fund an annuity with non-taxable accounts. Use taxable accounts and then you can depreciate the cost for tax purposes.

Lifetime annuities have a higher payout when interest rates are high, so don't buy one.

-- Ron

I don't see that exact type listed out of the 11 different types of immediate annuities described at

Single Life Income with No Payments to Beneficiaries ("SL") You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries.

Single Life Income with Up to 5 Years Paid to Beneficiaries ("5CC") You receive this income for your lifetime, which means, you can never outlive this income, even after the specified period has ended. If you should die during the first 5 years your beneficiaries will continue to receive this income until the end of the 5th policy year.

Single Life Income with Up to 10 Years Paid to Beneficiaries ("10CC") You receive this income for your lifetime, which means, you can never outlive this income, even after the specified period has ended. If you should die during the first 10 years your beneficiaries will continue to receive this income until the end of the 10th policy year.

Single Life Income with Up to 15 Years Paid to Beneficiaries ("15CC") You receive this income for your lifetime, which means, you can never outlive this income, even after the specified period has ended. If you should die during the first 15 years your beneficiaries will continue to receive this income until the end of the 15th policy year.

Single Life Income with Up to 20 Years Paid to Beneficiaries ("20CC") You receive this income for your lifetime, which means, you can never outlive this income, even after the specified period has ended. If you should die during the first 20 years your beneficiaries will continue to receive this income until the end of the 20th policy year.

Single Life Income with Installment Refund Paid to Beneficiaries ("IR") You receive this income for your lifetime, which means, you can never outlive this income. If you should die before receiving an amount equal to the premium, your beneficiaries will continue to receive this income in installments until the total amount paid to you and your beneficiaries equals the premium. Payments stop only upon your death after the total premium has been paid back to you and your beneficiaries.

Guaranteed Income for a 5-Year Period Certain Only ("5PC") You receive this income for 5 years only, not for your lifetime. If you should die during the 5 years your beneficiaries will continue to receive this income until the end of the 5th year.

Guaranteed Income for a 10-Year Period Certain Only ("10PC") You receive this income for 10 years only, not for your lifetime. If you should die during the 10 years your beneficiaries will continue to receive this income until the end of the 10th year.

Guaranteed Income for a 15-Year Period Certain Only ("15PC") You receive this income for 15 years only, not for your lifetime. If you should die during the 15 years your beneficiaries will continue to receive this income until the end of the 15th year.

Guaranteed Income for a 20-Year Period Certain Only ("20PC") You receive this income for 20 years only, not for your lifetime. If you should die during the 20 years your beneficiaries will continue to receive this income until the end of the 20th year.

Guaranteed Income for a 25-Year Period Certain Only ("25PC") You receive this income for 25 years only, not for your lifetime. If you should die during the 25 years your beneficiaries will continue to receive this income until the end of the 25th year.

Should be: Lifetime annuities have a higher payout when interest rates are high, so don't buy one now.

-- Ron

I could be wrong, but I understand there is a time lag between the movement of interest rates and lifetime annuity payouts. So, if interest rates go up to 8%, say, in a few more years, it may be another year or so after that before the annuity payouts catch up.

I was considering a piggy-back college endowment annuity as an option when I dont have earned income. In the case you get 5% of principal or an age-related immediate rate. With the exception of 2007, the endowment investors do better than most investment pools. So the the piggy-back would catch up to the immediate in a few years, then exceed it.

Yep, but none of the 11 stated here (except maybe the Installment Refund) say what is done or who is to get the "leftover" money, i.e. any principal left when all payment obligations are fulfilled. I understand that the INS company keeps it.

Chip

There isn't any leftover money. You are buying an insurance policy against living too long. Like buying auto insurance, once you've bought it, the money is gone.

If you live too long, the insurance company pays you more than you paid in with interest. If you die too soon, the insurance company pays you less than you paid in with interest.

If the insurance company has done their job, they will get some profit from the fact that a large population will, on average, die more or less on time.

-- Doug

In that case it may pay to wait. Anybody know of a calculator that will calculate net present value of an immediate annuity based on an interest rate and a person's sex and age?

-- Ron

Yes, that calculator would be useful. Surely, someone familiar with insurance products should be able to answer the question.

Unless I'm missing something, it isn't rocket science. Find a set of mortality tables such as:

Find out how long a person of your desired age and gender is expected to live, then do an NPV on the annuity's payments for that period using the interest rate of your choice.

-- Doug

As I understand it, the problem is not just doing a calculation based on an interest rate, but rather knowing the interest rate the insurance company uses to do its calculation. Suppose next year interest rates go to 6% and then stay at 6% for several more years. The annuity you get next year may still be based on the 4% rate of this year. It may be a while longer before the company catches up and bases the calculation on

6%

But certainly the general principle holds: Buy annuities when interest rates are high! But not necessarily as soon as they first reach whatever you consider to be "high."

With a simple immediate annuity, you are buying a fixed payment stream for the rest of your life. Interest rate changes are the insurance company's risk/reward. There are variable annuities that vary with interest rates, but you will need to read the particular contract to figure that one out. -- Doug

Yes, thanks, I understand that. But, unless I am mistaken, that fixed payment stream of an immediate annuity is relatively higher if interest rates are high at the time the annuity is purchased. It was also my understanding that there is a time lag between a change in interest rates and the corresponding change in the size of the fixed payment stream a given amount of money buys.

I just tried that using a spreadsheet. Looking at the immediatiateannuities.com site the annuities for a 70 year old correspond to an interest rate of between 2 and 3 percent.

-- Ron