Money’s Worth Measures For Income Annuities
June 9, 2020 by Wade Pfau
Annuities have a reputation for being a high-fee financial product. Is this reputation deserved? We address this for different types of annuities throughout the book, starting with income annuities. It is a bit complicated to answer this for income annuities because they do not have visible fees. There are no additional fees extracted from the quoted payout rate, as the payout rate is a net number after fees have been deducted internally. Simply, with the internal fees, the quoted payout rate is lower than it could have otherwise been.
Fortunately, we can reverse engineer the fair price for an income annuity without fees and then compare it with real-world annuity payout rates in order to obtain a money’s worth measure for the income annuity. We have already seen how to calculate annuity prices. The additional complication relates to making reasonable assumptions for interest rates and mortality rates.