Author Topic: Short-term annuities  (Read 2228 times)

Gary123

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Short-term annuities
« on: May 18, 2016, 07:07:46 AM »
I noticed an intriguing set of annuity options for my IRA funds that I had not previously considered.

In the list of annuities was a 10 year fixed-term with 20% return.  If you placed just over $500,000 it would return an income of about $9,600 monthly for 10 years.  If you squirrel away maybe 50% and live on the other 50% wouldn't you recover your original balance in 10 years while enjoying the equivalent of your principle?

we stay away from annuities normally because of fear that future inflation would destroy the value of the fixed payments for life.  However, a 10-year burn in today's near negative interest rate world seems less risky and the income level would be over $100,000 per year until a number of rental property loans (15 year) begin paying off to replace that six figure income.

Can anyone tell me why this would be a bad idea?  And the taxes would not be incurred until the money is withdrawn so one could transfer IRA balance into a tax-deferred annuity without penalty.  A garauntee return of 20% for the next 10 years sounds very tempting.

Scandium

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Re: Short-term annuities
« Reply #1 on: May 18, 2016, 03:03:52 PM »
They give you 20%+ return per year for 10 years?! How is that possible/sustainable? A ponzi scheme?

bobechs

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Re: Short-term annuities
« Reply #2 on: May 18, 2016, 05:41:48 PM »
They give you 20%+ return per year for 10 years?! How is that possible/sustainable? A ponzi scheme?

The word 'return' has no fixed meaning, although you have taken the privilege of assigning an invidious one in this case, apparently.

A more intutively descriptive term for the payments to a beneficiary from a fixed term annuity is cashflow - it is the amount 'returrned' to the beneficiary which can be conceived of in in two parts; income (taxable, usually) from 'returns' on the investment component of the transaction and 'return' of the capital used to generate the investment 'returns.'

If you run any set of numbers through this common annuity calculator,
https://www.immediateannuities.com/

 you'll see that they promise cashflow -returns, if you will- in the ballpark of 20% on a five-year fixed annuity and 10% on a ten-year fixed.

That's not great appreciation- close to break even on holding cash in a bank, but these annuities are usually backed by bonds purchased by the issuer and bonds, as we all know, are not making a lot of money at the present moment either.

OP seems to have the same confusion about the word 'return' means in this context and his projections, even expressed as cashflow do seem quite high.  I suspect -but can't know on the limited information given- that what he is looking at is a projection for an annuity with a deferred start date (maybe twenty years in the future) with a certain term payout staring on that future date.

But maybe it's a Ponzi scheme.  That's not the first thing I think of, but it's really up to you.






Scandium

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Re: Short-term annuities
« Reply #3 on: May 18, 2016, 05:51:05 PM »


They give you 20%+ return per year for 10 years?! How is that possible/sustainable? A ponzi scheme?

The word 'return' has no fixed meaning, although you have taken the privilege of assigning an invidious one in this case, apparently.

A more intutively descriptive term for the payments to a beneficiary from a fixed term annuity is cashflow - it is the amount 'returrned' to the beneficiary which can be conceived of in in two parts; income (taxable, usually) from 'returns' on the investment component of the transaction and 'return' of the capital used to generate the investment 'returns.'

If you run any set of numbers through this common annuity calculator,
https://www.immediateannuities.com/

 you'll see that they promise cashflow -returns, if you will- in the ballpark of 20% on a five-year fixed annuity and 10% on a ten-year fixed.

That's not great appreciation- close to break even on holding cash in a bank, but these annuities are usually backed by bonds purchased by the issuer and bonds, as we all know, are not making a lot of money at the present moment either.

OP seems to have the same confusion about the word 'return' means in this context and his projections, even expressed as cashflow do seem quite high.  I suspect -but can't know on the limited information given- that what he is looking at is a projection for an annuity with a deferred start date (maybe twenty years in the future) with a certain term payout staring on that future date.

But maybe it's a Ponzi scheme.  That's not the first thing I think of, but it's really up to you.

OP said payout of $9.6k per month for 10 years on $500k. So over $1.1mill returned. That's not just returning principal. If it was 20% total (which is what you meant?) it would be $5k per month. Which would maybe make sense as a non-scam product..

bobechs

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Re: Short-term annuities
« Reply #4 on: May 19, 2016, 11:42:34 PM »


OP said payout of $9.6k per month for 10 years on $500k. So over $1.1mill returned. That's not just returning principal. If it was 20% total (which is what you meant?) it would be $5k per month. Which would maybe make sense as a non-scam product..

Well, I agree that those specific numbers make no sense at all and I'd like to know where OP got them.  Not least because if those are legit I'll never have to work again.

My main point was that the "return" on an annuity does consist of both investment earnings and refund of principal, and that if it is a deferred start annuity the investment earnings could equal or exceed the principal.

A back of the envelope calculation shows that starting out with $500K, with no additional contribution (an assumption) held for 30 years (an assumption) at 3% compound interest (another assumption) gives ~$1.2M --which would support more than $10,000/mo in payments for ten years running.

That is not at all what OP is saying the deal is, I know.  But until he lets loose some more information it is all rank speculation.

Gary123

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Re: Short-term annuities
« Reply #5 on: May 31, 2016, 07:16:44 PM »
I was referring to an "immediate fixed income annuity" from Fidelity.  The prior poster who commented that your principle is depleted is correct so maybe I should have called them "payouts" instead of "returns."

The amount is variable based on numerous factors including whether a surviving spouse can receive it, your age and so one.  In an extreme example, an 85 year-old can get an "immediate fixed income annuity" with extremely large payouts because the payments extend beyond life expectancy if there is no rights for surviving heirs or a spouse.

MustacheAndaHalf

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Re: Short-term annuities
« Reply #6 on: May 31, 2016, 08:39:58 PM »
My guess is OP missed an asterisk somewhere in the fine print.  You're right to conclude it's too good to be true, but after that point it's time to walk away.