Whatâs An Annuity? The Basics and the Math
What the heck are annuities? Thatâs what weâll focus on today. Weâll explain annuities in simple terms.
What the heck are annuities? Thatâs what weâll focus on today. Weâll explain annuities in simple terms.
Annuities get a lot of press, both good and bad. What it really comes down to is that while annuities aren’t recommended investments for everybody, they can be exactly what’s needed for certain investors.
The post Finding the Best Annuity Quotes & Rates appeared first on Good Financial Cents®.
When I write about retirement and retirement planning, I frequently mention that I aim for my savings and investments to last another thirty years. So, for instance, when I use retirement calculators to determine how long my nest egg will last, I use 78 as my projected age of death. Several readers have written to ask how I arrived at this number.
For example, Richard wrote:
Iâm wondering why youâre only projecting out 30 years. Youâre only 48. Iâm 54 (and retired) and, in my projections and calculations, I go out 40 years. I probably donât need to plan out that far, but you never know. My last surviving grandparent died just a couple years ago at age 99.
This is a great question. In fact, I believe life expectancy is the most critical factor in determining how much money you need to save — and how much you can spend. Unfortunately, it’s also the variable that’s most difficult to calculate with any kind of precision.
When the mainstream media publishes an article about early retirement, the comments are filled with folks who say things like, “These people are cheap. I could never live like that. Besides, what if they drop dead tomorrow? Then what good is all of that money? YOLO!”
On the other hand, early retirement forums are filled with people who go to the opposite extreme. “OMG! I can’t believe you’re only expecting to live until age 90. What about modern medicine? What about gene therapy? What if you live to 108? Boy, then you’re going to be sorry you didn’t save more!”
Both sides make valid points.
Here’s the bottom line: If you knew when you were going to die, you could calculate how much money you’d need to get from now to then.
Pretend that next week Elon Musk announced he’d developed the Methuselah, a machine that can tell users the precise date and time of their death. It’s 100% accurate and somehow can even account for accidental death. When the Methuselah comes on the market, you try it just for kicks. It tells you that you’ll die on 06 November 2034. You have about seventeen years left to live.
Based on that information, you’d be able to calculate with great precision how much money you’d need in order to make it to your date of death. You’d know whether you need to continue working or could call it quits right now. You’d know whether you had enough saved to travel the world in luxury or if you needed to live a more meager existence.
Unfortunately — or fortunately, depending on your point of view — there isn’t a way to tell with any precision how much longer you have to live. Elon Musk hasn’t developed the Methuselah machine. (Yet.) All you can do is make an educated guess.
One basic way to estimate your time remaining is to consult an actuarial life table. The U.S. Social Security Administration, for instance, has a basic period life table that shows how much time the average person has left to live based on their current age. A 48-year-old man like me can expect to live another 31.32 years — until I’m 79.
My cohorts and I each have a 0.4167% chance of dying this year. Of 100,000 of us born in 1969, 93,759 are still alive.