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 more than 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
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 that you'll
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 5, 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.immediate annuities.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.