According to the URL at the bottom of the OP's posting (www.aig...), a
$1M inflation-adjusted immediate annuity would be for only $5,050 per
month, which is about 3/4 of the non-inflation-adjusted payout, and
represents a 6% initial withdrawal rate.

Dave

<<the annuity although not indexed for inflation usually will pay
around 8% depending on age>
FWIW, the calculator at http://www.immediateannuities.com seems to
agree with this, although it shows a very slightly lower rate.

$1M at 8% should be $6,667/mo, and the calculator gives $6,615/mo at
age 65 for a male, which is pretty close. A female would receive only
$6,228/mo.

John Cowart

if your not interested in passing on any money to heirs a low cost
immeadiate annuity is a pretty good way of drawing a life time of
income thats more than you could normally draw..as an example to allow
1 million dollars to generate a steady income forever the rule of thumb
is you can draw 4% a year or 40,000 a year to live on indexed for
inflation aasuming a 50/50 mix at least of stocks bonds and cash...just
bonds and cash may give you less than 20,000 ...the annuity although
not indexed for inflation usually will pay around 8% depending on
age....almost double a month to live on forever....not a bad way of
getting something more..of course when you die they keep it all

Gary Brolis wrote:
- quote -

Gary, thanks for the explanation. Let me followup with a couple of
questions to see if I understand. It seems to me that there are two
major cases to consider, based on whether the money is qualified or
not.

Case 1: unqualified. Suppose I have a shoebox of cash under my bed and
decide to turn it into a fixed-income income stream by buying either a
fixed immediate annuity or a bond fund. The annuity has a fixed
expiration date, say the date I expire, although I know that there are
other options. To make the comparison as equal as possible, I take the
same payments I could get from the annuity from the bond fund, selling
some of the bond fund if necessary to supplement the fund's dividend.
In both cases, my initial investment is not taxed. With the annuity,
the part of each payment that is not a return of investment is taxed as
ordinary income. With the bond fund, both the dividends and the capital
gains resulting from selling some of the fund are taxed at a prefered
rate. With the annuity, I won't run out of money or leave anything to
my heirs. With the bond fund, I may run out of money or leave something
to my heirs.

Case 2: qualified (with zero basis for simplicity). I convert an IRA
into an income stream by buying either a fixed immediate annuity or a
bond fund. Again, the annuity has a fixed expiration date the date I
expire and I take the same payments I could get from the annuity from
the bond fund by selling some of the bond fund if necessary. Now, all
income received from either is taxed as ordinary income. And again,
with the annuity, I won't run out of money or leave anything to my
heirs, while with the bond fund, I may run out of money or leave
something to my heirs.

Are the above essentially correct? What am I missing?

Dave

Yep, the annuity payments would fall under section 72, meaning that
they would be partially a return of investment and partially earnings.
The earnings component would be taxed each year at your "ordinary" tax
rate, which could be over 30%. Whereas, fixed-income investments are
generally only taxed upon receipt of income (i.e., dividends) or upon
the sale of the investment which may occur years later. The income or
sale proceeds would be taxed at "capital gains" rates, which could be 5
or 15% (even then you could invest in tax-free muni's or something).
So you have possible tax deferral combined with a lower initial tax
rate each year. Just a thought to consider. It could make a
difference over time...


Gary Brolis
http://www.MechanicsofMoney.com
http://www.MechanicsofMoney.com/blog.php

Mechanics of Money Financial BBS wrote:
- quote -

What do you mean? Would the annuity payments be taxed any differently
than other fixed-income investments such as money market funds or
bonds?

Dave

Dont forget that the annuity payments would not be as tax favorable as
other investments.


Gary Brolis
http://www.MechanicsofMoney.com
http://www.MechanicsofMoney.com/blog.php

According to www.immediateannuity.com, a non-inflation-adjusted
immediate annuity paying $6,135 per year on a monthly basis would cost
a 65-year-old male $77,249. It makes sense that the inflation
adjustment would add the remaining $23,751.

Related to an earlier thread about capitalizing social security income
stream and treating it as a fixed-income part of your portfolio, in my
case, the web site you reference says that my social security benefit
stream has a present value of $297,000. If I add that to my bond
position in my portfolio, that makes my asset allocation about 50%
stock, 50% bonds.

Dave

I just started learning about annuities. I agree with most sources that
deferred annuities are generally not great investments. But I wanted to
focus on immediate annuities, where you pay a lump sum for a guaranteed
income stream for life.

According to http://invest-faq.com/articles/ins-annuities.html :
"The very small payoff from annuitizing is the reason that almost no
one actually does it... For a fixed payout you would be better off
putting your money into US Treasuries and collecting the interest (and
keeping the principal)."

Since I heard that Vanguard had very low annuity costs, I went to their
website, where they have instant quotes [1]. I found that if a 65-year
man bought a $100,000 immediate annuity with inflation-adjusted
payments for life, their initial payment would be $6,135. That seems
like a really good deal to me, certainly not a "small payoff". I
calculated that if he lived until 100, that would be an equivalent of
5% real return, or about 8% nominal if you assume 3% inflation. If he
only lived to 85, then that would be equivalent to 2% real return,
which is still competitive with inflation-protected treasuries. In any
case, a 6% inflation-protected drawdown for life sounds great to me. So
would you say that the above quote is incorrect?

[1]
http://www.aigretirementgold.com/vli...=RequestaQuote