Deciding whether to buy an annuity is one of the more complicated calculations an investor might have to make. Not all annuities are the same. Nor are investors. And a new study from Boston College says that demographics play a crucial role in determining the value of an annuity to any given investor.
The Center for Retirement Research at Boston College’s new study, “What Is the Value of Annuities?”, looks at the investment vehicle through two lenses:
Money value -- the ratio of the expected present value of the payments that the annuitant expects to receive over their lifetime compared to its premium cost. A money value of less than 1 can be traced to the costs in an annuity.
Wealth equivalent -- roughly how much wealth an investor needs to do as well with annuitization of the annuity as without annuitization. This calculation is designed to account for the protection against outliving one’s assets that an annuity provides.
Among the findings of the report are:
- While Black Americans have a lower expected value than whites due to shorter lifespans, they gain more from the insurance because their lifespans are more uncertain.
- In general, women fared slightly better than men in terms of the money’s worth calculation, as did those with the highest level of education.
- The expected present value is about 80 cents per dollar for immediate annuities and 50 cents for deferred annuities, amounts that have remained stable since 2000.
