Many agents and advisors choose one or two annuity products, learn some of the main details, and then try to sell it to everyone. Spoiler alert, there is no best annuity out there so make sure that you see at least 3 to 5 different carriers quotes when shopping for any annuity type.
Because annuities (regardless of type) are commodity products, you need to be able to access as many annuity carriers as possible in order to find the top contractual guarantees for your specific situation. It’s important to use the best fixed rate feeds and annuity calculators that objectively show the numbers based on the highest guarantee.
As with all things, it’s important to know the best ways to use these annuity calculators...so let’s dig into the details on how they work.
There is so much bad and misleading information when it comes to annuities, most people have no idea where to start. For example, Single Premium Immediate Annuities (SPIAs) can be contractually structured over 30 different ways. Most people believe that when you die owning an income annuity, the evil insurance company keeps the remaining money. That is only 1 of the 30+ ways to structure the policy, and you can contractually make sure that 100% of any unused money goes to your listed beneficiaries...not the annuity company.
Purchasing an annuity comes down to 2 questions:
From those 2 answers, you can then choose the correct annuity type before you start using an annuity calculator to find the highest contractual number.
Two questions I get all of the time is “How much does a $100,000 annuity pay per month?” and “How much will an annuity pay per month?” Both are pretty broad questions that are both looking for a specific income payment amount.
One way to quote for lifetime income is to put in a lump sum with your date of birth, or dates of birth if joint, and when you want the income to start. The other way is to solve for a specific monthly or annual income amount. For example, instead of putting in the lump sum, you put in the income amount and then run the quote to find out how much money it will contractually take to guarantee that desired monthly amount.
For whatever reason, people seem fixated with interest rates. I blame Jimmy Carter and the high CD rates people enjoyed back then. We will probably never see those levels again, so get used to this new normal for interest rate levels.
With that being said, lifetime income annuities that provide contractually guaranteed income for life is primarily based on your LIFE EXPECTANCY. I capitalize and emphasize that for a reason because people mistakenly think that interest rates drive the pricing train. They don’t. Interest rates are secondary to your projected life expectancy at the time you start the payments. Life expectancy is the bogey you need to focus on, and why you can’t “time” annuity purchases.
People always ask me what the rate of return or return on investment (ROI) is on a lifetime income annuity. I don’t know that until you die. Up until that point, it is a pure transfer of longevity risk. Do you ask the rate of return or ROI on your pension or Social Security payments? Of course not. All you care about is that money hitting your bank account every month. Annuity anyone?
So remember that when it comes to retirement income that pays you regardless of how long you live, life expectancy drives that pricing train.
Not all annuity types are set up for lifetime income. Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit). Life expectancy has nothing to do with MYGAs. They are 100% interest rate driven from a pricing standpoint because MYGAs are classified as fixed annuities...or fixed rate annuities.
MYGAs guarantee a contractual fixed rate for a specific period of time, just like CDs. So a fixed term annuity calculator, annuity growth calculator, or fixed rate/MYGA feed will list the highest interest rates available for a specific term that is approved in your state of residence.
So you put your lump sum dollar amount into a MYGA that pays a specific annual percentage rate for a contractual period of time. That’s an easy to understand compound interest calculator because MYGAs grow tax deferred in a non-IRA (i.e. non-qualified) account.
Not all annuity types work well with annuity calculators. Tax deferred annuity types Variable Annuities (VAs) and Fixed Index Annuities (FIAs) are “potential return” products that aren’t really driven by guarantees even though they both are classified as a life insurance annuity contract.
Income Riders attached to VAs & FIAs have calculators available to show those future lifetime income guarantees, but these riders don’t have to be attached to these deferred annuities. Those attached benefits can only be added at the time of application.
When deciding to place that hard earned retirement savings into an annuity, think of shopping for an annuity like shopping for a plane ticket. You are looking for the best deal for the “destination” or goal you want to achieve. You punch in the specific details and parameters, and then choose the best price guarantee available.
Unless you were just wanting frequent flyer points, you would never just shop just one airline. The same applies for annuities. You would never allow an agent or advisor to show you just one or two carriers. It’s just common sense. Shop them all every time.
When quoting annuities and using annuity calculators, remember that quotes are like a gallon of milk. They expire every 7 to 10 days and you can only lock in a specific quote number if you are going through the application process. This especially applies to income annuities and guaranteed income types.
So if your retirement plans involve annuity transfer of risk strategies, make sure you find an agent or advisor with annuity calculators or fixed rate feeds that show as many carriers as possible. With annuities, the goal is to find the highest contractual guarantees for your specific situation. It’s that simple in a commoditized annuity world.