- based on life expectancy, or 50% probability of survival, and
- based on a 25% probability of survival, which is the longer expected lifetime basis we recommend using in our website for planning purposes.
In this post, we will examine the implied interest rate assumptions built into quotes from ImmediateAnnuities.com as of September 17, 2023 and compare the quotes and the implied interest rates with the results of the similar exercise we performed and summarized in our post of January 9, 2023. We will also discuss a few other considerations that may affect your decision to buy a SPIA at this time.
The key takeaway from this post is that implied interest rates (rates of return) on SPIAs have generally increased a little since the beginning of the year, but are still a little lower than when we measured them in November of 2022. We have no idea, however, if they are going to increase even more in future months, or possibly decrease, for that matter.
Updated Implied Interest Rates in Current SPIAs
The second column of the tables below show monthly life annuity quotes for males of different ages per $100,000 of premium from Immediateannuities.com as of January 9, 2023 and September 17, 2023. Life expectancies shown in third column are 50% probabilities of survival from the Actuaries Longevity Illustrator (ALI) for non-smoker males in excellent health (which have not been updated yet for this year). The fourth column (Implied Interest Rate) shows our calculation of the fixed investment rate of return that would be earned if a person bought the annuity and died at his current age plus his life expectancy from the ALI table (in months). This investment return is net of insurance company expenses and profits (but not net of taxes). These rates are nominal rates and not real (net of assumed inflation) rates.
Implied Interest Rates based on ALI Life Expectancy as of 1/9/2023
Current Age | Fixed Monthly Life Annuity | Life Expectancy in Months (based on AAA Longevity Illustrator 50% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $532 | 396 | 5.3% |
60 | $570 | 336 | 5.3% |
65 | $628 | 276 | 5.3% |
70 | $710 | 216 | 5.1% |
75 | $833 | 168 | 5.1% |
80 | $1,030 | 108 | 2.4% |
Implied Interest Rates based on ALI Life Expectancy as of 09/17//2023
Current Age | Fixed Monthly Life Annuity for Male ($100,000 Single Premium | Life Expectancy in Months (based on AAA Longevity Illustrator 50% planning horizon for a non-smoking male in excellent health | Implied Interest Rate |
55 | $541 | 396 | 5.4% |
60 | $583 | 336 | 5.5% |
65 | $637 | 276 | 5.5% |
70 | $711 | 216 | 5.2% |
75 | $844 | 168 | 5.3% |
80 | $1,027 | 108 | 2.3% |
The more recent table shows that annuity quotes from ImmediateAnnuities.com have generally increased a little since January 9th of this year and so have the implied interest rates. As noted above, the implied interest rates consistent with the ALI mortality table (50% probability of survival) for older non-smoking annuitants in excellent health are much lower than for younger annuitants, indicating that insurance company pricing for older annuitants may assume longer life expectancies and/or lower interest rates due to shorter assumed durations.
The tables below tell a different story for individuals who live until their 25% probability of survival age rather than their 50% probability of survival. It can be argued that these implied rates of return are more applicable to individuals considering an annuity purchase if their plan includes living approximately five/six years longer than their life expectancy.
Implied Interest Rates based on 25% Probability of Survival as of 1/9/2023
Current Age | Fixed Monthly Life Annuity | Lifetime Planning Period (based on AAA Longevity Illustrator 25% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $532 | 468 | 5.7% |
60 | $570 | 408 | 5.9% |
65 | $628 | 348 | 6.3% |
70 | $710 | 276 | 6.7% |
75 | $833 | 228 | 7.6% |
80 | $1,030 | 168 | 8.7% |
Implied Interest Rates based on 25% Probability of Survival as of 9/17/2023
Current Age | Fixed Monthly Life Annuity | Lifetime Planning Period (based on AAA Longevity Illustrator 25% planning horizon for a non-smoking male in excellent health) | Implied Interest Rate |
55 | $541 | 468 | 5.8% |
60 | $583 | 408 | 6.1% |
65 | $637 | 348 | 6.5% |
70 | $711 | 276 | 6.7% |
75 | $844 | 228 | 7.8% |
80 | $1,027 | 168 | 8.6% |
It is interesting to note that implied interest rates (or rates of return) for older annuitants are higher than implied returns for younger annuitants on this alternate “planning” mortality basis. This is because moving from 50% probability of survival to 25% probability of survival generally adds about five/six years to the expected time of death, and an additional five/six years is a much more significant increase for an 80-year-old than it is for a 55-year-old (and may explain why insurance companies may be more likely to assume greater anti-selection by older annuitants in their pricing).
The above charts develop implied interest rates on two mortality bases for current annuity quotes for males. Based on a quick review, it appears that comparable implied rates of return at the illustrative ages shown would also be developed for current SPIA quotes for females.
Is Now the Right Time to Buy a SPIA? Some Other Considerations
There are many plusses and minuses associated with buying SPIAs vs. investing your retirement assets in other vehicles that we are not going to repeat here. Here are a few other considerations that you might want to think about before making your decision regarding annuity purchases.
- Buying an SPIA will generally strengthen your Funded Status. Based on current default assumptions for the Actuarial Financial Planner, a 65-year-old male who spends $100,000 on a SPIA at today’s rates will increase the present value of his retirement assets by $27,983. A 65-year-old male who plans to live to 100 (rather than the default assumption of 94) will increase the present value of his assets by $39,478 by making the same purchase.
- With recent higher-than-expected levels of price inflation, the present value of your non-risky assets may no longer cover the present value of your essential expenses and you may want to strengthen your “Floor Portfolio” at this time.
- Many individuals are convinced that investment in SPIAs are less liquid than investment in bonds. If your bond investments are dedicated to funding your essential expenses, the sense of increased liquidity over annuities may be somewhat illusory. There are retirement experts (like Dr. Wade Pfau) that we have cited in this website who advocate purchasing annuities vs. owning bonds in retirement.
- IRS 10-year Constant Maturity Treasury (often cited as a proxy for insurance company interest rates for annuity pricing) have ticked above 4.3% and are now higher than they were last October/November when SPIA rates were approximately 5% higher than they are today (and are higher today than any time in the past 10 years). Will these recent increases translate into even higher SPIA amounts and returns in the near future or have SPIA amounts peaked? We don’t know.
Conclusion
Increases in interest rates in the recent past have generally increased the amount of current monthly immediate life annuity that may be purchased with a given premium amount and has slightly increased implied interest rates (or rates of return) on currently available SPIAs. We have no way of knowing whether additional increases in interest rates used to price SPIAs can be expected at this time. We are not investment advisors or insurance brokers and cannot provide advice on timing or the financial advisability of SPIA purchases. We do plan to continue to monitor implied rates of return on SPIAs in this blog (on both a pricing and planning basis).
