Amortization v. Annuitization

L1: Amortization v. AnnuitizationGordon, this is a question for you. Your Amortization calculation seems to be based on an annual payment which begins at the end of the period (an annuity immediate) while the Annuitization factor seems to be based on a payment that begins immediately (an annuity due). I’m puzzled why we wouldn’t use the same assumption for both methods. Any clues?2004-06-07 16:39, By: BillE, IP: [206.195.193.10]
L2: Amortization v. AnnuitizationActually you would have to ask the IRS.
The examples for the amortization method in 89-25 assumed a payment at the beginning of the period. In Rev Rul 2002-62, the example assumed a payment at the end of the period. However, last time I checked, the annuitization results still matched the examples.
My real guess is that whoever developed the examples at the IRS used the wrong type of amortization formula. But, mistake or not, the new calculation (together with the Annuity 2003 Table) means that the amortization formula will always result in the highest payment.
Hope this helps.2004-06-07 17:08, By: Gfw, IP: [172.16.1.71]

L2: Amortization v. AnnuitizationI think I can shed a little light on this subject as I have had some conversations with the IRS folk who wrote Rev. Rule 2002-62.
The amortization method & example given by the IRS assume an end-of-period annual payment. Their reasoning for this is twofold:
1. The IRC specifically says “not less frequently than annually” with regard to distribution frequency. Further, if you read the legislative intent footnotes; there is little said about more frequent distributions. Based on this; the IRS has NO perview to question or regulate intra-year distributions; therefore, the only assumption they can make is an end-of-period single distrbution.
2. The annual distribution differs by just a couple of dollars whenever one does the actual math for monthly/quarterly or a berginning of period distribution. In short, the differences are immaterial.
The annuitization method is derived from the 2000 census mortality table which only contains year-end survivors per million. As a result, and the fact that the mortality table is curvi-linear, if you were not a survivor; e.g. you died; it is not possible to determine if you died one day or 364 days into the measurement period; therefore, everyone is implicitly assumed to have expired at mid-year. Nonetheless, the IRS, having no perview on intra-year issues hereignores the 1/2 year issue; the effect of which is that when actually applying the annuitization mathematics makes an implicit assumption that the distribution occurred at mid-year. I didn’t explain this well, but I hope you get the picture.
TheBadger
wjstecker@wispertel.net
2004-06-07 17:39, By: TheBadger, IP: [66.250.23.21]

L2: Amortization v. AnnuitizationBill, I really like your explanation (even with the big words and actuarial terminology), but the same logic would have held true prior to 2002-62.
And, any actuary can easily modify the annuity formula to do an end of year payment if there really was a reason to worry about the not less frequently than annually۝ wording which was there prior to 2002-62.
In reality if it is material for one method, it would be also be material for the other method.
I still think it was merely a mistake_ But, then we all have our own opinions.2004-06-07 18:37, By: Gfw, IP: [172.16.1.71]