Return from an annuity is more than 2% p.a.

Dear Kin Lian,

In your blog today on investment tips, you mentioned about investment of an annuity for a person 60 years and over. I looked up the NTUC web site. It shows a monthly payment of about $468.60 per month for $100,000.

I did a quick calculation and found that the return is not about 4 - 5% as stated by you, but closer to 2% per annum. In that case, why buy an annuity? The rate is about bank's rate.

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My reply:

If you invest $100,000 to earn 2% per annum, you will receive $2,000 a year or $167 per month.

If you buy the annuity, you will get $469 a month, or $5,628 a year. This represents a nominal return of 5.6%. The monthly payment will increase each year with bonus, which is expected to vary from 0% to 3% a year.

The higher payout under the life annuity is possible because of the consumption of the capital during the lifetime of the annuitant.