Since our post of October 11, 2013, we have been recommending use of a 5% investment return assumption and a 3% inflation assumption when using the simple spreadsheets on our website to develop a spending budget. These recommended assumptions were loosely tied to estimated assumptions “baked into” an annuity purchase rate of approximately $600 per month for a single premium of $100,000 (or $167 per each $1 of monthly income) for a 65-year old male obtained from the Incomesolutions.com website back in the Fall of 2013.
Annuity purchase rates have become more expensive since October 11, 2013. In our post of December 3, 2014, we recommended staying with the 5% investment return and 3% inflation assumptions for 2015 budget determinations even though the annuity purchase rate for a 65-year old male had increased to $571 per month per $100,000 of premium (or $175 per each $1 of monthly income). As of February 5, 2015, however, the monthly annuity purchase rate for a 65-year old male per $100,000 had increased to $549 (or $182 per each dollar of monthly income). To maintain a more comparable relationship between investment in annuities and investment in other securities, we now recommend using a 4.5% investment return assumption and a 2.5% inflation assumption for budget determinations. We continue to recommend an expected payout period equal to 95 minus current age, or life expectancy if greater.
This change in recommended assumptions should have very little impact on budget determinations for retirees with little or no fixed income annuity/pension income. It will, however, have a more significant impact for those with significant amounts of fixed income annuity/pension income or for those who are considering purchasing an annuity with some of their accumulated savings.