A male at age 65 can invest $150,000 in the following:
Payable for 20 years $902
Payable for 30 years $709
Payable for life - no refund $929
Payable for life - with refund $827
If he choose a fixed term annuity (20 or 30 years), he will get a monthly payout of $902 or $709 respectively. The money will run out at the end of the fixed term. In the event of death during the term, there is some money remaining that can be paid to the estate.
There is a 52% chance of surving to 85 years and 24% to 95 years.
If he choose a life annuity (with no refund on death), he can get a monthly payout of $929. This payout continues for as long as he lives, but there will be no refund on death.
He can get a bigger payout payable for a potentially longer period under a life annuity. This is possible because those who die earlier leave behind the balance of their money in the fund to pay to those who live longer. This is "pooling of longevity risk".
He can opt to buy an annuity that gives a refund on death during the first 20 years of the balance of 20 years payment. The monthly payout is $827, which is 11% less than the "no refund" annuity.
A female at age 65 can invest $150,000 in the following:
Payable for 20 years $902
Payable for 30 years $709
Payable for life - no refund $747
Payable for life - with refund $728
The payout under the life annuity is lower, as a female is expected to live longer than a male.
Disclaimer: These figures are based on an interest rate of 4% and the population mortality rates, with adjustment for future reduction in mortality. It ignores expenses and profit margin.
This is written to educate the public about the principles of life annuity. They may not reflect the commercial terms that may be offered by an annuity provider.
I used an interest rate of 4% to calcuate the annuity as it is the same interest rate paid by CPF on the retirement account. I hope that CPF can be convinced to offer a life annuity using the same interest rate. There is no additional cost to the CPF. This may make the life annuity to be more attractive.
Someone asked me why I used an interest rate of 4% to calculate the life annuity, as the yield on Government bonds is around 3%.
ReplyDeleteMy reason: I want to use the same rate that is being paid by CPF on the retirement account. I hope that CPF can offer the life annuity based on 4% interest rate, so that it becomes more attractive to the annuitants.
As this is the same interest rate, there is no additional cost to the CPF.