Is my annuity payout too good to be true?
I have an old annuity that should have a $50,000 balance when I'm 60 years old. The various calculators on the net usually say a payout of over 5 years (not for life) would be around $800 per month. That assumes 4% interest. This seems too good to be true. I know that much depends on the contract and other variables, but in general, does the $800 plus a month seem an accurate figure?
12 x $800 = $9600.
$9600/50,000 == < 20%
There's no reason something worth $50,000 couldn't pay out $9600 each year for 5 years. You could stick $50,000 in an FDIC insured bank savings account, earning less than 1% and pull out more than $10,000/yr.
In fact, if the numbers you've posted are correct, you're earning not only less than 4% interest (over those five years) but actually *losing* money over those 5 years.
If they're projecting the 4% growth between *now* and when you're 60 -- presumably a long way off -- that's not a terribly surprising figure. You can investment grade bonds which yield around that right now. Just for reference, a certain long-term corporate bond index fund -- with a duration of around 14 years and an average (current) bond maturity (within the diversified portfolio) of around 24 years -- is showing a current SEC yield of over 4%.
As you said, there are a lot more factors here - what are the terms of the contract, does it have other payout options, etc. etc. As well as issues about yourself -- how old are you now, how long a way off is 60, and how much are you putting in now (or are you putting in the money a bit at a time over many years), etc. etc.
So - no - with what little you've given - those numbers don't look terribly surprising at all. If you have any concerns, contact the annuity company and/or the person who sold it to you and ask for more clarity and illustrations of how they come up with the numbers.
$800/mo for 5 years assumes no interest on a $50,000 balance. In other words, if you had $50,000 in a bank savings account, earning no interest, you could withdraw $833/mo for 5 years to have a $0 balance at the end of the 5 years.
Maybe you are asking if the current balance could grow to $50,000 by the time you reach 60? It is possible, but more information would be required for this analysis.
Hope this helps.
It actually would be slightly higher than that. But if you have any doubts, put in a competitive bid among a few different insurance carriers for an immediate annuity. In fact, you should do this anyway if there are no surrender penalties to make sure you are getting the highest offer. If it is an "old" annuity, there should be no surrender penalties.
Hope this Helps and Best of luck, Dan Stewart CFA®
Perhaps my math is off but that sounds quite bad actually, missing how this is too good to be true. 5 years of payout at $800 give you total payout of just $48,000 when the policy should be worht $50,000 at the beginning of the payout.
Sound like you may want to keep looking for a better account - or annuity. Make sure you are working with a Fee-Only Fiduciary Financial Planner to avoid getting sold some high commission product where the math just doesn't add up.
A $50,000 balance paid out monthly over five years would equal $833. $50k/60 months = $833/month. If you are only getting $800/month, then this is certainly too good to be true---for the insurance company. You would be receiving a negative rate of return on your money.
A quick search for current 5 year payouts from an annuity with $60k in it shows monthly a payout of over $1,015/month, or $60,900 total payout.
Please note, that before you accept any annuity payout out, you should calculate if your annuity is worth more dead or alive. Meaning, you already have a contractual guarantee from the insurance company regarding how much they will pay you, you should compare that with other options:
Could you get the same or potentially better cash flow payout by existing in individual bonds?
What are other companies paying out right now?
You could benefit from a side by side comparison of your options.