Can You Really Double Your Money in 10 Years in an Annuity?

Last Updated Sep 20, 2011 5:41 PM EDT

I recently received an email from Ned, one of my blog readers, who'd heard of deferred annuities from both Prudential and Guardian Life that "guaranteed they would double your money in 10 years." A few people in his office were investing in these annuities, and he wanted to know if the claims were realistic.

I immediately whipped out my HP-12C calculator and determined that it would take a steady annual rate of return of 7.2 percent for each of the 10 years to double your money. Then I called representatives of Prudential and Guardian who confirmed, as I suspected, that they have no products on the market today that would absolutely guarantee a return of 7.2 percent for 10 consecutive years, and then let you withdraw all of your money after 10 years.

This is no knock on Prudential or Guardian. Their annuity guarantees are backed by bonds and other fixed income investments, and these types of investments are currently yielding rates far lower than seven percent. For example, 10-year Treasuries are currently yielding close to two percent, and high quality corporate bonds are yielding somewhere in the three and four percent range. No insurance company has a magic formula that can turn these types of yields into a guarantee of seven percent per year for 10 years.

It's possible, however, that Ned and his friends were hearing about annuity products that are more complicated than simply offering a fixed and guaranteed interest rate. Both Prudential and Guardian have deferred annuity products that accumulate both an "account value" and a "benefits base." The account value forms the basis of the amount you can totally withdraw at any time. Under their current guarantees, you won't come close to doubling your account value in 10 years.

However, the "benefits base" is an amount that accumulates with investment earnings, and, if you elect, can be converted to an annuity that pays a lifetime income. Typically, if you're age 65 at the time of annuity conversion, you'll receive an annual lifetime annuity with a minimum amount equal to five percent of the benefits base. According to Guardian's representative, they are currently guaranteeing that the benefits base will double in 10 years, but you need to convert this base to a lifetime annuity to realize this gain. With the Prudential product, the benefits base won't quite double in 10 years but comes close.

Note that if you want to realize the higher investment earnings that are credited to the benefits base, you need to leave the benefits base with Prudential or Guardian for the rest of your life by converting it to a lifetime annuity. If you don't want a lifetime annuity and want to withdraw your savings instead, you'll realize a much lower rate of return. This is simply the deal you need to make if you value receiving a lifetime income that you can't outlive, which is a reasonable goal for many people.

I congratulate Ned for investigating potential investments on his own and not investing in a product just because his office friends are. Any time you hear about an investment that's supposed to double in a specific amount of time, you can quickly calculate the rate of return that's needed for the investment to double, then compare it to similar investments to see if the claim is reasonable. And make sure you understand exactly what is guaranteed and the terms and conditions that are attached to the guarantee.

Ned's story offers an instructive story in human behavior. Often people hear what they want to hear: In the above situation, the description of a complicated product might have been simplified to "double your money in 10 years" -- particularly after the story's been told a few times. Remember the old children's game of telephone? A statement was retold around a circle of friends, and after it had gone full circle, it was compared to the original statement, often with hilarious -- and almost always incorrect -- results.

So take the time to investigate your investments and read the fine print. You'll thank yourself later.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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