Pension Questions: How To Buy An Annuity

by Pension Forecast

William asks…

Does AARP Have a plan to supplement retirement income?

If I retire and find my retirement income is insufficient can I buy an immediate annuity which will provide additional monthly income? If so how much cash investment will I need?

Pension Forecast answers:

If you have enough money “to buy an immediate annuity which will provide meaningful additional monthly income” you might be better off leaving it invested where it is earning income without the management fee involved with buying the annuity. Keep in mind that to buy an annuity that will provide meaningful income, you’ll need to spend a lot of money based on today’s low rates of return. Money that I’m guessing you don’t have. My advise to you is that if you’re near retirement, you need to become a saving fiend and perhaps work longer than you were planning. Good luck.

John asks…

Can Someone Please Help? Ordinary Annuities. FV=A ((1+i)^n-1)/i? PV=A [1-1/(1+i)^(m*n) ]/i ?

Sam Jones plans to retire at age 65. He wants to supplement his retirement by buying an annuity that will provide $2,400 each year for 10 years. If money is worth 8% compounded annually, how much will Jones have to pay for the annuity at age 65?

I think it uses one of these 3 formulas?
FV=A ((1+i)^n-1)/i
or
PV=A [1-1/(1+i)^(m*n) ]/i
or
A=(PV*i)/(1-1/(1+i)^n )

Can anyone figure this out?

Pension Forecast answers:

PV = $16,104.20, which is how much he would have to pay for the annuity.

You should use the second formula you have, assuming this is an annuity-immediate (meaning that he pays for it at age 65 and gets the first payment at age 66)

you want the present value at age 65, and that’s PV in your equations.

PV = 2400 * (1 – ((1/(1+i))^10) / i where i = 8%

the FV formula would give you how much money he would have at the end of 10 years if he invested $2400 every year. Your formula for A would allow you to solve for what the payments would need to be if you knew the present value of the annuity.

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EDIT:
Jacob S is incorrect. Sam will receive $2400 every year for 10 years, so the future payments will have a present value of less than $2400 (they will get discounted back to today). The sum of the present value of those payments will therefore be less than $24,000. Paying over $34,000 makes no sense. If that were the correct formula/price, Sam would be paying $34,000 now to get paid only $24,000 over the next 10 years. That makes no sense.

Chris asks…

How do Independant Financial advisers get paid?

I want to see an IFA to talk about what annuity I should buy. Do they charge a fee or do they work on commission from the Annuity provider?

Pension Forecast answers:

They can do both or either. Personally, I think that you should use a fee-only Certified Financial Planner. That way they have no financial interest in what you buy or invest in.

Mary asks…

How do you go about transferring an annuity (pension)?

My mother-in-law is probably going to have to enter a nursing home and will not be able to afford it. I understand that Medicaid will pay for the care, but first she has to use up all her assets. She has one small annuity that she gets from her former employer and we’d like to have that transferred to us so that we can A) go ahead and get her on Medicaid and B) be able to use that money to buy her the incidentals she’ll need.

So how do we do that? We don’t want to break the law of course, so we need a legitimate method to have that money transferred. Is that even legal is also a question I have too, if you know that.

Thanks for the responses :)

Pension Forecast answers:

Http://www.aarp.org/health/insurance/health_medicaid/medicaid_the_basics.html

The above link will help with general questions. Much depends on which state you live in. In my experience, the government will get the income from the annuity. Also, be aware that there is a “look back” period in most cases. That applies if your mother-in-law gives money away…the state will look back (generally three years)…if the gift is within that period, the state will still consider that money to be part of her total assets.

Donald asks…

How do I find the amount of time in an annuity fund problem?

The question is this: you can afford monthly deposits of $200 into an account that pays 5.7% compounded monthly. how long will it be until you have $7,000 to buy a boat?

I used the formula FV=PMT([(1+i)^n-1]/i) but couldnt figure out how to solve for n. Please help me

Pension Forecast answers:

First month 200x.057=11.40 (interest) ……….211.40 (balance)
second month 211.40x.057=12.05+200 …….. 423.45
third month 423.45x.057=24.14+200…………. 647.59
fourth month 647.59x.057=36.91=200 ………… 884.50

can you see how it goes? Keep going like this and you will reach $7000
I am sure there is a shorter way to find your answer, but you can at least see how this works.

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