Saturday 17 February 2024

Deferred Lifetime Annuity Annual CPI adjustment

I logged into my Deferred Annuity account to check if the annual cpi adjustment had been made. The purchase date (after a bit of a delay processing my initial online application) was 6 Jan 2023. The initial $10,000 purchase was for a lifetime annuity with the monthly payment start deferred until age 99 (I initially picked 100, but it turned out that 100 was maximum allowed age for the first payment date, so I had to start receiving payments prior to age 100). The annuity has no spouse benefit and no cash-out option, so it will be (is?) worthless (to me) if I die before 6 Feb 2062. But I still thought it was worth a gamble as my great-aunt lived to 104, my parents are both alive (in their 90s) and two of my grandparents lived to 94. And who knows what medical advances may extend healthy lifespan during the next 40 years? Life expectancy in Australia has been increasing by 3 months per year since the start of the 20th century, although maximal lifespan hasn't been increasing as much (generally maxmimum lifespan seems to be limited to around 110 or so except in very exceptional cases).

Anyhow, the initial monthly payment amount was $3,722.92 ($44,675.04 pa) and is supposed to be indexed annually to increase with the official CPI figure. The new monthly rate is now showing when I log into my online account - as $3,922.99 ($47,075.88 pa) which is in line with the September Quarter 2023 annual cpi rise (5.4%). I had expected it to increase by the December Quarter figure, which just came out as being 4.1%. So I am glad that the increase used the September Quarter figure (which was the latest one available as at the anniversary date).

One positive thing about having a deferred annuity that will provide enough to cover my basic retirement income needs from a fixed age (99) is that I *could* calculate my retirement savings to be fully consumed by that age ( the old "die with zero" retirement spending strategy), without any concern that I might 'outlive' my retirement funds. But it isn't really an issue for me, as I expect the initial minimum withdrawal rate of 4% from age 65 when I move my SMSF account balance into 'pension phase' will be more than enough to cover this (while I am still working I will either recontribute this 'pension' payment into my QSuper account (I want to build it up to $600K by age 70 so I can purchase a 'Lifetime Pension' from them - which should provide around $44,416 (with no spouse benefit option selected), and/or use it to pay off my investment property loan while I am still working. The QSuper Pension isn't indexed to inflation, but does have an annual adjustment based on how the underlying Balanced Investment Fund. The past 10 year average performance has been 7.5%, so this *should* mean an average annual increase of 2.5% over the past ten years. During that period inflation averaged about 2.7%, so the adjustment may be roughly in line with cpi during my retirement.

Basically the $600K Lifetime Pension purchase at age 70 should cover my minimum retirement income needs in perpetuity, so any payments I receive from age 99 onwards from the Deferred Annuity would simply be a bonus. I would have to live to at least 101 to get a decent ROI on the $10K Deferred Annuity 'investment', but the ROI would become very impressive if I lived as long as my great-Aunt ;)

Subscribe to Enough Wealth. Copyright 2006-2024

1 comment:

mOOm said...

I did the analysis I think you wanted: