That is a VERY tempting yield, but as you are well aware, inflation and time will erode the value without any COLA. We have an annuity for H’s pension, which will give me 55% if he dies before I do. It does have a COLA. We also had an option to convert some of his other funds into a pension, but it had no COLA and we figured we really didn’t need it, so we passed on the opportunity which expired after he retired. We rolled it over into a Roth IRA instead and figure our kids will get it at some point in the future. Our healthcare costs so far haven’t been bad because H was able to keep his family federal insurance plan in retirement with the employer paying 75% of premiums and an annual cap on out-of-pocket expenses that keep things so far quite manageable. With H having Medicare A & B, he generally pays no out of pocket.
A quick calculation shows that per 100K, we would get ~ $ 8700 per year. After 10 years, its $87k. Assuming the market returns 5% per year, after 10 years, the gain from the market in the 403 would be ~ $63000. It takes > 20 years to break even keeping it in the 403 not including taxes. Of course that’s assuming a 5% market return. If I don’t need that 8700 per 100k per year, it can be invested. I don’t really need this for this year, I’m already up ~10% in taxable accounts in the market for the year.
"per 100K, we would get ~ $ 8700 per year. After 10 years, its $87k. "
huh?
that cant be correct. $87000 return after 10 years per $100000 invested ?
no way…
Id be very careful withe the assumption of achieving a 5% market return/ yr.
We are at the end of a recovery, and no one is predicting a lot of growth in earnings during the next decade.
inflation is also expected to be very low for the forseeable future.
Yes it is correct: 8700 per year X 10 years = 87000. It is a immediate fixed annuity that yields 8.7% with 100% survivorship.
The 5% number is a number to get some idea of the value of the annuity with respect to leaving the money in a 403 plan. Nobody knows if we are at the end of a recovery. Nobody knows whether the return going forward is going to be 5%, 10%, 0, -5 - 10 or any other value that somebody can make up. Anybody who says differently is full of sh**.
Any other value? I must be full of sh@@. Stocks aren’t going to be down 100 percent a year going forward. 
Stocks aren’t going to be down 20 percent a year either. Stocks aren’t going to be down 10 percent either if we use 30 years. I plan on living another 30 years. At least. 
I think 10 percent gains going forward for decades is a low probability. Higher than going down though.
@doct, I think what your annuity situation shows is how poor annuities are because most annuites are not going to give off 8.7 percent a year.
My question is…with this drop in interest rates, are annuities paying less than last year?
The point I’m making is nobody knows what the market is going to do going forward so whether I assume 5% (which is probably reasonable) or some other value is somewhat irrelevant. The yield on this annuity is good from my standpoint. I don’t know what is going on with annuities except this one. The high yield is probably one of the reasons our state is going bankrupt.
@Doct, I was teasing you.
I think 5 percent is reasonable.
I have no idea what the future holds. A friend told me that Teva pharmaceuticals said in the future, I think 5 to 10 years, people are going to have a 3d printer in their homes. Teva is going to ship people the chemical compounds and people are going to make their own pills. Each pill will be tailor made to the individual.
So, if Teva is going to do this, it is likely all the major drug companies are going to do this.
If this is true, I think I may not want to own shares in Walgreens, CVS, the wholesalers of drugs, etc. May not be good for some sectors of commercial real estate.
Or maybe Teva is just blowing smoke.
“A friend told me that Teva pharmaceuticals said in the future, I think 5 to 10 years, people are going to have a 3d printer in their homes.”
I won’t. Our local public library has one. I can just use theirs.
I find, in the current state of prescription drug abuse and the heroin epidemic, the idea of chemical compounds being shipped to the average Joe as questionable and concerning. Are these 3d printers going to be able to formulate time released compounds for example? Doesn’t seem that easy to me, but I’m no expert.
@DocT, are you sure about the terms? Are you sure that it’s an immediate annuity? For 100% survivor, at your ages, in CA (don’t know, so that’s what I picked), Life and 10 years certain, $100k premium, I got less than 5,000 year payout commercially. That’s WAY less than $8,700, so I am not sure that we’re comparing apples to apples.
For returns, btw, I’m conservative. I figure on 0% real, expect 2% real, and anything more means I’m “living large.”
Doc, I’d be REALLY careful trusting any annuity promising that kind of return. In this economic environment of projected low interest rates,and declining GPA .
Pension managers are quietly talking about having to reduce their “promised” payments to retirees.
Look what is happening in numerous cities , like Chicago, which made promises to pensioners that they now realize simply cant afford to pay.
be careful…
100% certain. If it was just my wife, it would have been 9744 per year. For 100% survivorship it is .887 x 812 x 12 = 8643, if we were both 60. Since I’m 65, it is a bit higher. It must go into her voluntary account on or before her retirement and payment begins immediately. It cannot be done except at that time, right at retirement.
wow!
wish I had that option…
I have had to adjust my “mental model” of how the stock market works. I am embarrassed to admit this, but I did not know that foreign central banks were buying US equities. I always thought that central banks were restricted to fixed income investments, and in the US market only bought Treasuries and Agencies. I believe the Fed does not buy equities (but has been rumored for years to be involved in the stock index futures) but I had no idea foreign central banks were buying US stocks! This changes everything. When the players were individuals, portfolios (pension funds, insurance companies, mutual funds, etc) , and hedge funds, even with hedge fund leverage there was a limited amount of buying power, and cash balances meant something. All of these players could be shaken out of the market by a sharp decline. Putting central banks into the mix, they have unlimited funds (they just print more money) and can keep buying regardless of price. This is very scary to me. Central bank quantitative easing - continuous endless bond buying, QE after QE, has led to negative interest rates in half the world. Meanwhile, currently extremely low US treasury rates, it seems to me, can only go lower as long as European rates remain negative - our rates look high and attractive in comparison. So what can these same Central Banks do to stock prices if they keep buying? Can we get negative P/E ratios?
There are always drawbacks however when considering the whole picture. In our case, the wonderful state of Connecticut will exclude teachers with pensions above a certain amount from collecting their spouse’s social security upon death. In my wife’s case, she will collect none of my ss on my passing.
How do the taxes work on an annuity? It is my understanding that if we use tax deferred money, all of it will be taxed. In the 100k case, the whole 100 k is taxed if it comes out of a tax deferred account. If it is after tax money, the IRS does some kind of life expectancy calculation and a portion of the income generated is taxed. Is this correct? On who’s life expectancy is this calculated on? I’m assuming my wife who is 60.
“I have no idea what the future holds. A friend told me that Teva pharmaceuticals said in the future, I think 5 to 10 years, people are going to have a 3d printer in their homes. Teva is going to ship people the chemical compounds and people are going to make their own pills. Each pill will be tailor made to the individual.”
And the individual will have to certify with a boatload of paperwork that the house where the pill is made is FDA-compliant. 
LOL. Ain’t happening any time soon. This is the most utopian thing I’ve ever heard.
What I can see is that a drug giant will “print” the pills for you. And Amazon will drone-ship it into the palm of your hand (and drop a glass of water into your other hand to wash the pills down).
In any case, the era of small molecules is coming to an end. New drugs will be biologicals and will require some sort of controlled environment storage. We are working on it to make them more stable, but it will take a while.
@NJRes, I find what you wrote about central banks scary. Hard to comprehend what is going on.
Lots of questions… The following is just a few…
Are the central banks buying bonds at negative interest rates?
If central banks are buying stocks, isn’t that a move towards socialism?
I guess the central bank of Japan owns a lot of Japanese equities now.
Doesn’t the fed in the US have to publish its balance sheet?
@BunsenBurner, interesting.
So what does the move to biologics do to large pharmaceutical companies with drugs like statins?
Small molecules are not going away. There will be fewer new ones coming on the market, IMO, after all, there are finite ways of connecting carbon, nitrogen, oxygen, sulfur, and phosphorus into something with a molecular weight under 1,000. Or they will be used in some combo with biologics, either as a mixture or as a conjugate. ADC and immunotherapy are all hot of a sudden, and they are already beyond the proof of principle stage, unlike gene therapy. Also, with small molecules, the games are now about formulation and crystal structure. If these routes can provide a clearly beneficial property, like better pharmacokinetics or drug stability, they may be patentable. A new patent extends the proprietary term of the drug, making the co’s invest more money into this kind of research. Or, as you said, mixtures of known small molecule drugs tailored to a specific patient’s needs (but no 3D printing of pills, LOL).
“I think 5 percent is reasonable” - Is that predicted earnings? Or net after considering inflation?
@colorado_mom, 5 percent net after inflation? I don’t see that. Since the high of the year 2,000, 5 percent a year compounded is close to the return of the stock market. I think a 5 percent return compounded is reasonable. Could be higher. Just my opinion.
I know people like to use 10 percent historical rerturns when they project what they need for their retirement. People can. I’m not. I can’t predict the future.
I would rather be pleasantly surprised than unexpectedly disappointed.