Is there a statistical or otherwise-relevant reason why a broker would be unable to project an anticipated lifetime monthly payout on an annuity 6% minimum guaranteed return, 15 year fixed rate, $100,000 investment?* The purchaser is 50, female, intends to hold annuity for 15 years and begin lifetime monthly payout at age 65. The broker states that monthly payment dollar amounts cannot be projected or even “guesstimated” as they would be based on actuarial tables (longevity) in effect at the time the payouts begin. Why wouldn’t it simply be the account value divided by the estimated remaining lifespan of the investor in months? (Or, if they are using a different formula, the results of that different formula but still based on the estimated remaining lifespan of the investor in months, which presumably doesn’t vary beyond a reasonable person’s ability to “guesstimate”)?
*FYI – it is estimated account value could be $239,000 at 15 years
The agent has somewhat of a point, but let’s just assume for a moment that medical science doesn’t advance in the next few years, and assume that this woman was going to begin drawing on an annuity worth $239,000 today.
It appears average lifespan for women today is 80 years, and 73 for men.
So let’s assume that she begins drawing on the annuity today, and draws for 15 years. $239,000 divided by 180 months (15 years) is $1,327 per month.
Now if the value of the annuity were to keep appreciating at 6% during the payout period, she’d be getting $2,016 per month.
The company or the state, may not permit writing such a contract but it’s not fundamentally different than any annuity.
If you pay for an annuity today, it will be based on current mortality rates, but 15 years from now mortality rates may be different. The insurance company takes that risk.This risk and others, like changes in interest rates, are built into the pricing.
The math is a little more complicated than that, but not much. For each future month (or year, for simplicity) the broker (or his actuary) will multiply the projected payment times the PRODUCT of the appropriate discount rate and probability that the purchaser will be alive at that date. The obvious way to estimate this is to use today’s mortality table. Based on the nearest actuarial table I have at hand, which is some 20 years out of date, I’d concur with Jonathan’s estimate of about $2,000 per month.
Yes, that’s just $100,000 * 1.06^15. At least the broker got that much right.
So basically we weren’t that far off, the guy just understandably doesn’t want to commit himself and risk the fallout of being misunderstood re: actuarial rates changing between now and then.