Impact of life expectancy on actual rate of return on immediate annuity

v The rate of return is usually considered to be equivalent by a number of people who get instant annuity quotes in their search for current annuity rates. However, it is of prime importance to mention here that the payout rate of annuity is certainly not identical to the rate of return with yield being completely different as well. For instance, an online website that you may use to calculate the current annuity rate may determine it to be 10%. This will imply that for an initial investment of about $100,000, you’d be able to claim your $10,000 a year. However, it should be kept in mind that the actual rate of return as well as the yield is not even close to this 7% as determined by the website. It has to be taken into account that with every single annuity payment that you receive, a small portion of your initial investment is being returned to you.

Therefore, the 10% payout rate as determined by the website can certainly not be compared with bond or income fund for retirement or any other such investment. Getting an instant annuity quote is more closely related to risk management and not investment, which explicitly determines why you it is not fair to compare it with other investments. However, due to certain reasons, you may still want to be informed about the rate of return. But as evident from the above discussion, the calculation of the actual return rate in your search for current annuity rates isn’t as simple of a task as it may appear to be. The primary reason behind that is the fact that the actual rate of return is greatly dependent on the expectancy of your life. For instance, if you make an initial investment of about $100,000 to purchase annuity and you are guaranteed an annual return of say $700 on monthly basis or a total of $8400 on yearly basis. This implies that you have been guaranteed a return of 8.4%. However, with every single annuity payment that you receive, a small portion of your initial investment is being returned to you.

Therefore, if you happen to live long enough that every single chunk of your initial investment has been returned to you, you will still be able to claim your $700 a month. This means that with an increase in your life expectancy, the actual return rate increases along with it as well. This is one of the fundamental principles of business studies and this is exactly why calculation of actual return rate isn’t an easy task to be accomplished since you can never be sure about your life expectancy. However, while making a calculation of your actual return rate against your initial investment of purchasing annuity, the life expectancy must be taken into account. Without considering the life expectancy, the actual return rate can’t be determined accurately or your calculated amount may even not be close to the actual rate of return. Therefore, the rate of return against immediate annuity must be calculated considering long life expectancy as well as the short life expectancy separately. 

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