Life Co Annuity Vs. Self-Annuitization

L1: Life Co Annuity Vs. Self-AnnuitizationThe topic of Immediate Annuities verus Self-Annuitization comes up frequently most often within the context of one’s current age and the current, prevailing interest rates. I would like to suggest that these are the wrong parameters to be evaluating; instead I would suggest that the central question is under what conditions can I individually beat the insurance company at its own game? My answer is always irrespective of one’s age or interest rates provided one is starting with at least $100,000. Here is why:
An insurance company needs to:
1. Sell you the product.2. Administrate your account.3. Invest the proceeds of your purchase.4. Make a profit.
All of these steps cost money; sometimes a material amount of money whether expressed in the lump sum purchase of the monthly/annual payout. However, the average retiree really does not need steps (1), (2) and (4); he or she can easily replicate those functions for themselves. How about step (3) which really sits at the core of the whole process. Can an individual invest a lump sum of cash to effectively realize the same or greater periodic payout at the same risk level? Again, I say yes.
In an earlier thread, Dennis was looking at an annuity that paid $2300 per month for life for a purchase price of $445,000 at age 51. Dennis has a life expectancy of 33 years. What if Dennis skipped the life company annuity and instead purchased 33 years of treasury zeros; what would his monthly/annual payout be?
Interestingly, $27,600 per annum costs approximately $448,000; about the same as the life annuity with one major difference: should he expire before his 84th birthday there will be something left for his heirs; should he expire after his 84th birthday he will technically be penniless & therefore flipping Big Macs to by food.
This plan is one in which Dennis actually assumes less risk (treasury zeros are about as risk-free as it can get) whereas the life insurance quote has an implied 6.2% yield, e.g. $27,600 / $445,000.. What if Dennis just roughly models what insurance companies do, let’s say 50% treasuries and 50% AAA long corporate bonds? Based on current prices, this plan would yield approx. 5.25% to 5.75% or approx. $23,400 to $25,600 per year; slightly less than the annuity but with one huge trade-off 100% protection of principal upon his death as all of the bonds still exist and are still paying semi-annual interest payments.
In summary, I would suggest that there are lots of viable models to safely beat the insurance companies through the use of: treasury zeros, long treasury bonds, AAA long corporates.
TheBadger
wjstecker@wispertel.net
2004-09-18 10:48, By: TheBadger, IP: [66.250.23.21]

L2: Life Co Annuity Vs. Self-AnnuitizationMr. Stecker;
I could not agree with you more. It must be disclosed to potential buyers of immediate payout annuities that the transaction is one of transferring the title to the corpus to the insurance company in return for a lifetime income.
Peace and Hope,
Joel L. Frank
2004-09-18 12:13, By: Joel L. Frank, IP: [67.80.22.51]