Payment calculations for a variable annuity

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ourbrooks
Posts: 1575
Joined: Fri Nov 13, 2009 3:56 pm

Payment calculations for a variable annuity

Post by ourbrooks »

I would like to calculate the payments if I annuitize the balance of a variable annuity.

I know the formula for a fixed annuity: It's balance X (1/remaining-life-expectancy + interest rate). The interest rate is usually something like the 10 year T bill rate.

On the Vanguard site and several other annuity sites, they talk about "actuarial methods" and "units" but no one gives a description precise enough to put into an Excel spreadsheet or write code.

Can anyone give me a pointer or an algorithm. (The algorithm can use the abbreviation DHF for "deduct homongous fees" for all those place in which this happens.)
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Oicuryy
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Re: Payment calculations for a variable annuity

Post by Oicuryy »

The first payment from a variable annuity is calculated the same way as for a fixed annuity except that the AIR is used as the interest rate. Payments after the first vary as the annuity unit value varies.

AIR is Assumed Interest Rate or Assumed Investment Return. It is shown in the prospectus for the annuity. The Vanguard Variable Annuity Plan uses 4%. The Vanguard Lifetime Income Program offers a choice of 3.5% or 5%.

Page B2 of this Statement of Additional Information for the Vanguard Variable Annuity Plan gives the gory details of how the payments after the first are calculated. Note how the AIR is used to offset part of the investment return.
https://personal.vanguard.com/pub/Pdf/sai064.pdf

By the way, I don't think the formula in your post is what insurance companies really use.

Quotes for the Vanguard Lifetime Income Program are available here.
http://www.agincome.com/iva/IVAControll ... uestaQuote

Ron
Money is fungible | Abbreviations and Acronyms
Topic Author
ourbrooks
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Joined: Fri Nov 13, 2009 3:56 pm

Re: Payment calculations for a variable annuity

Post by ourbrooks »

Thanks! Not surprisingly, I overlooked it in my search.

The formula I used doesn't take into account up front fees, sales charges and the like. When I apply it to a 65 year old male and a 3.5% AIR, I get a payout of 9.3%; the quote from the site is 7.1%. Since the quote is from a general site, not one specific to Vanguard, it's not hard to imagine 2.1% disappearing in sales charges to cover contracts sold through agents, etc. The formula turns out to be exact for a TIAA Traditional annuity, which doesn't have sales fees.
Verde
Posts: 349
Joined: Mon Dec 31, 2007 3:47 am
Location: South Africa

Re: Payment calculations for a variable annuity

Post by Verde »

The formula you use for a fixed annuity is a rough approximation (in fact very rough).
See pg 2 of this thread for a better calculation method which is based on actual mortality tables.

http://www.bogleheads.org/forum/viewtop ... 9#p1377979
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