I'm super noob here so bear with me. This weekend my FIL was telling me his colleagues are talking about an annuity where they put $400,000 down and get a guaranteed $2500 income for his and spouse's lifetime. I tried to see if this was a good deal and used an online calc that allowed me to figure our the monthly payout per month. Conservative number said 2999 per month, aggressive said 3500 or more. Don't remember. That calculator was oversimplified anyway. So now I apply the 4% rule (just read the article) since it pretty much guarantees not dying broke, and take that same $400,000, withdraw 4% 1st year, and I get $1333 income per month. So why wouldn't I choose the annuity with almost double guaranteed income until death?
Annuities can be quite complex, and there are some very good and not-so-good ones out there. Better companies include Lincoln, Prudential, Jackson, Nationwide, and John Hancock. Generally the more features the annuity offers, the more expensive it is. And any annuity is basically only as good as the company you buy it from. I'd have several different advisors explain several different products from several different companies to you in detail, including fees, etc. - and then you can go from there. I posted up a pretty good writeup either in this subforum or perhaps another one on this board a couple of months ago.
Something sounds fishy here. According to your calculator, using $3000/month as a basis, you would be getting $36k a year. For a 400k investment... in other words a guaranteed lifelong 9% per year. The average for the S&P500 in the long run is something like 8%. So you are basically going to get risk free profit that exceeds the average of the stock market? Now unless your friend is in his late 70's or early 80's, I start to go towards the old wisdom of "if it sounds too good to be true, it usually is." Annuities are yet another product that is meant to bring money TO THE ISSUER of the annuity. If they pay out 9% a year for an annuity then either they are expecting to beat the market by a huge marging or for you to drop dead within a couple of years. I might have missed something since I'm not too familiar with annuities. Could you post a link to this particular annuity?
Yeah, anything above 4-5% a year is probably a scam - or is based upon overly risky investing by the issuer at best.
You'd need to do a bit more research in regard to what you FIL's annuity terms are (what's a FIL by the way?). There are multiple terms that can effect the annuitization of the lump sum. The age of the couple (it sounds like it's based on both their lifetimes), if it has a refund component or period certain component, is it immediate or deferred, etc - can all effect the distribution amount. Also, your calculations assume no return ($1333), whereas the annuity companies apply a rate of return to their payout - so you're not comparing apples to apples. For example, add an assumed rate of return of 7% to your $400k and you can withdraw over $2400 per month (in today's dollars and not accounting for taxes) for 40 years before you exhaust the principal.
