Scott Burns

by Scott Burns

SCOTT BURNS explains how today's complex economic issues affect our day-to-day lives in common, everyday language. Burns explains intricate financial subjects better than anyone else and your readers will be grateful for that.

Download promotional material here.

Samples

UNDERSTANDING LIFE ANNUITIES

Q: My wife and I are retired, in our 70s, and live comfortably on Social Security, dividends and some CD interest. We have recently received an offer through AARP to invest in a fixed immediate annuity, with a cash refund feature that guarantees you will never be paid back less than you paid in. In other words, if a spouse dies, the surviving spouse would be paid the difference.

The offer indicates that a $100,000 annuity for a 76-year-old would pay $687 a month for life. That would be $8,244 a year, or an annual return before taxes of over 8 percent. We don't understand how the annuity can pay such a high interest rate when our CDs are paying less than 1 percent a year. Can you clarify this for us? -- A.R., Dallas

A: Part of what you are receiving is your original investment, not interest. The actual investment return that you receive, if any, will depend on how long you live. The longer you live, the better the chance you will get "your money's worth" from the contract. Remember, you're buying a life annuity. That's a contract with an insurance company that will provide you with a fixed monthly payment for your lifetime. These contracts have many variations:

A fixed monthly payment for your life only.

A fixed monthly payment for your life or at least five, 10, 15 or 20 years.

A fixed monthly payment for your life with an installment refund that guarantees that you, or a beneficiary, will receive at least an amount equal to the original investment paid out in monthly payments.

The offer you got in the mail, $687 a month for life with installment refund, is less than the amount offered on a similar contract on the Web site www.immediateannuities.com. There, the installment refund annuity payment is $757 a month, or 10.2 percent more. So the offer isn't "too good to be true." It's somewhat below typical offers.

---

Q: In a recent column you suggested buying a life annuity and investing the difference rather than buying a "living benefits" variable annuity contract. I am a 73-year-old female interested in the amount I would need to invest to receive $700 a month. I looked at the site you listed in the article and was not able to get the information. I am interested in a life annuity if I can find one that would have a monthly payment of $500 to $700 dollars and I could still have money remaining to invest in low-cost mutual funds. -- W.B., Dallas

A: According to www.immediateannuities.com, a 73-year-old woman who wanted a lifetime income of $700 a month would need to invest nearly $98,000 in a "single life with no payments to beneficiaries" contract. Contracts that guaranteed payments for life or a minimum of 5, 10, 15 or 20 years would cost more. A contract that guaranteed that the total payout from the contract would be at least what you paid in (called an "installment refund") would cost nearly $106,000.

Offers from different insurance companies vary greatly. The highest rated firms generally pay less than the lower rated firms. But you can often find significant differences in payments from companies of virtually identical financial strength.

One way to evaluate these contracts is to compare your life expectancy with how long it will take for the contract to pay back your original principal. The life expectancy of a group of 73-year-old white women, for instance, is 13.8 years. (Just as women tend to live longer than men, white women tend to live longer than black women. A group of 73-year-old black women, for instance, has a life expectancy of 13.2 years -- a full half-year less.)

Payback on this $700-a-month benefit is about 151 months, or 12.6 years. Only if you live longer than 12.6 years will your contract provide an actual return ON your money. But each month you live beyond that payback period works to increase the effective rate of interest rate on your contract. If you lived exactly to life expectancy, for instance, your $98,000 contract would have earned nearly $20,000 in interest to cover the $116,000 in payments. That calculates to an imputed interest rate of about 2.8 percent. If you live one year beyond expectancy, your imputed interest rate return will rise to about 3.6 percent.

This "money's worth" factor -- fear of not living long enough to get your money back with reasonable interest -- is one of the reasons many people think about life annuities but don't actually buy them.

ON THE WEB

"Buy a Life Annuity and Invest the Difference" (12/18/2009): http://assetbuilder.com/blogs/scott_burns/archive/2009/12/18/buy-a-life-annuity-and-invest-the-difference.aspx

---

Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com. Please visit my Web site at www.scottburns.com to comment on any of my articles, find referenced Web links or to discuss personal finance topics on my forums. Questions of general interest will be answered in future columns and on the Web site.

Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. The opinions of this article do not necessarily reflect the views of AssetBuilder Inc. This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, product or service.

COPYRIGHT 2010 UNIVERSAL UCLICK

^ Top | View more samples