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Author: SuaSponteMark Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76404  
Subject: Re: Annuities vs Investments? Date: 3/15/2007 8:38 AM
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I wouldn't take retirement finance advice from the AARP, if this is what they write about annuities.

If you take $100k and put it in laddered CDs or something else returning 5% consistantly, you can expect it to last about 24 years. Essentially, if you deplete $7k of the principal in year 1 and the remaining $93k grows at 5%, you'll have $97650 at the end of the year.

Year 2, take $7k at the beginning of the year and the remaining $90650 will be $95182.50 at the end of the year. The principal will as such deplete at a slightly accelerated pace and will "last" about 24 years, with $7k pulled every year.

You're betting, essentially, that a 65 year old won't outlive 24 years of distributions from such a strategy. Probably a decent bet. The annuity company is betting you'll die before getting 24 years of distributions. They do all sorts of risk calculations and know that they can afford to pay the average 65 year old $7k a year off of a $100k deposit. They know the life expectancy won't be 24 years and they'll likely make out in the end. They're probably investing the $100k in something other than the safety of CDs and money market accounts earning 5%, and making yet more in the process.

Mark
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