Annuity Purchase Rates
The annuity calculations in the Go2Income website utilize individual life annuity mortality assumptions and an assumed annuity interest crediting rate to estimate the Annuity Payment for a given deposit, gender and age, payment frequency, income start age and type of annuity. The annuity interest crediting rate is set each month based on an analysis of annuity rate quotes from a selected group of life insurance company issuers of annuities.
The results from this analysis of annuity purchase rates ("APR") are reverse engineered based on the assumed mortality assumptions to solve for a matrix of annuity crediting rates ("ACR"). These ACRs are analyzed for consistency and then averaged to produce a single rate for all current income life annuities, a single rate for deferred income annuities (DIA)/Qualifying Longevity Annuity Contract (QLAC) and separate ACRs for current income fixed period temporary annuities.
The calculations are limited by the scope of annuity issuers analyzed, the date on which the APR and resulting ACR matrices are constructed, and the ability to approximate annuity issuers' assumptions, particularly as regards mortality. While Golden Retirement, LLC ("GR" or "we"), the developer of Go2Income, seeks to accurately replicate assumptions that annuity issuers could typically apply, these assumptions are not publically available, and can vary widely by individual annuity issuers. Therefore, it is important to understand that the actuarial basis of the calculation is an approximation - with no known correlation to actual assumptions used by annuity issuers.
Additionally, APRs will vary by many factors including, but not limited to: state insurance laws and regulations; annuity issuer operating policies and credit ratings; and industry competition as well as key benchmark interest rates including, but not limited to, U.S. Treasury notes, bonds and bills, and, long and short term interest SWAP rates. Further, individual life insurance companies may respond to changing interest rates at different frequencies and on different days within a month.
For all charts and calculations, the APRs are based on the age you enter. (Even though you may be 70 ½, if you enter 70, age 70 is used.) The effect of this is to make you younger, thus increasing the annuity purchase rate, and thereby lowering the estimated annuity payments. Company quotes, however, will be based on your date of birth, and depending on the practice of any individual annuity issuer should result in higher annuity payments.
Income Start Age ("ISA").
For deferred income annuities, monthly payments are assumed to begin one month after attaining the ISA, for yearly cases payments are assumed to begin one year after ISA. For current income annuities, monthly payments are assumed to begin one month after purchase, and yearly payments are assumed to begin one year after purchase.
Return of Premium (ROP) (for Deferred Income Annuities).
GR assumes that the market value of the premium is returned if the ROP is elected.
The tax calculations affecting non-qualified annuity contracts are based on GR's interpretation of the IRS tax laws Those laws are applied to calculate the amount excluded from tax while any annuitant is alive as well as the unrecovered cost basis, if any, deducted in the annuitant's tax return after death. For QLAC calculations all amounts are shown on a before tax basis. All of those amounts would be taxed as ordinary income.
Current Income Annuity Charts
The chart on After Tax Payments allows the visitor to select from a list of assumed marginal federal income tax rates which are presumed to persist into the future. These represent the rate of tax on the incremental dollar of ordinary income. It does not reflect any state income tax rates, the reduction in taxable income from receiving annuity payments vs interest on fixed income securities, and for any reduction in income by the inclusion of Social Security payments as taxable income. If your tax bracket is not listed or you have questions, consult with your tax professional.
Rate of Return.
This chart solves for the internal rate of return from the current age to an assumed age at death (referred to as survival age) using the premium as the initial cash flow and the after tax annuity payments and the tax recovery at death. It assumes a marginal tax rate of 25% for all years. Increasing the marginal tax rate to 35% might lower returns by .5%. For fixed period annuities the chart graphs use the after tax rate of return through the end of the period as the constant rate of return.
This chart presents a measure of Liquidity based on the present value of the Annuity Payments that are made for either the annuitant or the beneficiary. We use a discount rate that is 1% higher than the ACR, as a measure of the conservatism that companies may use in determining commuted value. The total rate (ACR plus 1%) also represents a potential cost of borrowing against the collateral of these certain payments.
Do it Yourself.
While there are many alternative Do it Yourself ("DIY") strategies to generating retirement income, this chart focuses on a strategy using fixed income securities with similar investment characteristics. We assume that the investor is investing in highly rated tax free municipal bonds, with durations equal to the average duration of the income payout. We assume no defaults and assume a constant maturity fund such that the rate does not change during the period. We continue to accumulate the account at that rate even when it becomes negative. The chart assumes a marginal tax rate of 25% for all years for determining matching after tax payments. Increasing the marginal tax rate to 35% might increase the DIY strategy runs out by a one-half of a year.
QLAC and Future Income Charts
Required Minimum Distributions (RMD) Compared to QLAC Payments
In comparing QLAC payments to RMDs, we assume that an equivalent amount is invested in a high quality fixed income portfolio, with durations equal to the average duration of the income payout. We assume no defaults and assume a constant maturity fund such that the rate does not change during the period. We continue to accumulate the account at that rate even when it becomes negative. RMDs start at age 70 or the current age if later. We also ignore taxes in this comparison.
In comparing DIA payments to withdrawals, we assume that withdrawals are based on the same formula as used in determining Required Minimum Distributions (RMD). We further assume that an equivalent amount is invested in a high quality fixed income portfolio, with durations equal to the average duration of the income payout. We assume no defaults and assume a constant maturity fund such that the rate does not change during the period. We continue to accumulate the account at that rate even when it becomes negative. We also ignore taxes in this comparison. Cumulative Payments through Survival Age
For this calculation we include both payments made during the investor(s) lifetime plus the amount available at death. For QLAC or DIA, the amount available at death represents either the return of premium (if selected) before the Income Start Age ("ISA"), or the lump sum refund after ISA. For the RMD or withdrawal strategy, it represents the amount remaining in the account at death. Again, taxes are ignored.
The estimated APRs and the analysis of an annuity contract are not an offer or solicitation to purchase any annuity or any other financial product; nor are they any promise or guarantee of any returns past, present or future. Always speak with a financial professional before purchasing any financial product.
The APRs assume that the annuity is issued in a state with no premium tax, and thus may be more favorable than rates in states that impose state premium taxes. Any comparisons to alternative financial approaches are designed solely to educate users of the GR calculators. In no way do they reflect all of the attributes of any alternatives, and for this a financial advisor should be contacted for a more detailed analysis.
The calculations are intended to be used only for educational or academic purposes, and under no circumstances are they designed to be construed as any type of professional or personal financial advice including, but not limited to any tax advice, financial recommendation, financial solicitation, annuity advice, portfolio analysis, and income and/or retirement planning.
Note: All annuity purchase rates and related information in this tool are based on patent-pending GR market based pricing methodology for the month indicated, and do not represent any specific insurer's pricing. Any Current Annuity Quote is based on up to date rates for top-rated insurers.