How to evaluate an annuity
Guaranteed 8.2% annual return sounds too good to be true. Am I   right? Are there likely high fees, etc.? You're right. Guaranteed annual return is impossible, especially when you're talking about investments for such a long period of time. Ponzi (and Madoff) schemed their investors using promises of guaranteed return (see this note in Wikipedia: In some cases returns were allegedly determined before the account was even opened.[72]). Her financial advisor doesn't charge by the hour--he takes a   commission. So there's obviously some incentive to sell her things,   even if she may not need them. Definitely not a good sign, if the advisor gets a commission from the sale then he's obviously not an advisor but a sales person. The problem with this kind of investment is that it is very complex, and it is very hard to track. The commission to the broker makes it hard to evaluate returns (you pay 10% upfront, and it takes awhile to just get that money back, before even getting any profits), and since you're only able to withdraw in 20 years or so - there's no real way to know if something wrong, until you get there and discover that oops- no money! Also, many annuity funds (if not all) limit withdrawals to a long period, i.e.: you cannot touch money for like 10 years from investment (regardless of the tax issues, the tax deferred investment can be rolled over to another tax deferred account, but in this case - you can't). I suggest you getting your own financial advisor (that will work for you) to look over the details, and talk to your mother if it is really a scam. "Annuities are usually not good deals. Commissions to the salesman can be as high as 9% of the initial premium. They're not scams, just not the best deals for most circumstances. Basically, these things are a combination of an investment vehicle and multiple insurance policies, including permanent insurance. The 8.2% ""return"" is the total cash value of the account, which your heirs get if you die." You can get no load annuities through some no-load financial companies like Vanguard so to start with I'd see how what she is being offered compares with something that comes free of a sales load. I'd also question that fixed rate, seems pretty impossible to me, which makes me think there is some catch or 'gotcha' that we are not seeing that either brings down that rate, or makes it delusional (they are kidding themselves) or deceptive in some way.  In any case it's setting off my 'too good to be true' alarm at full volume, along with the 'shark attack' alarm as well. (I would strongly suspect the 'advisor' is advising the product that makes the most money for him, NOT what is in your mother's best interest)  A fixed annuity is an insurance product, not a security, because the insurance company must credit the annuity holder’s account with the specified interest rate for the contractually-stipulated time period, regardless of market fluctuations in actual interest rates. It is the insurance company that bears the investment risk, which it does by investing the annuity holder’s purchase proceeds in fixed-income instruments that the company hopes will provide sufficient return to fulfill its contractual representations to the holder.  THIS is why there is no prospectus (it's not a 'security' they are not required to provide one by SEC) because the risk is entirely with the company. Obviously as pointed out in the comments, the company could easily go out of business (especially of they sell a lot of these and can't find a way to get that kind of return on the invested money).  Now, ask yourself, if I was the insurance company, would I be comfortable guaranteeing that level of return over that much time if I intend to make a profit from it, pay sales comissions, and stay in business?   In terms of 'will they stay in business' I'd have a hard look at their ratings, and go compare where that is on the total range for AM Best (they are lowest 'secure' rating, next thing down is in the 'vulnerable' category) and Standard and Poors (4 places down from their best rating, next thing down is 'marginal' followed by 'poor')   You might also want to see if you can get any idea of historical ratings, is this company's ratings falling, or rising?   Personally, for the amount of money involved, I'd want a company with MUCH higher ratings than these guys..  THEN maybe someone could say 'no risk', but with those ratings?  an no, I don't think so! BTW I'd check over what this bozo (um sorry, that's not fair to clowns) is recommending she do with her own funds as well.  For example is he recommending she take something that is already tax sheltered such as an IRA and investing the stuff inside that in an annuity (kind of pointless to 'double shelter' the money, or lock it up for a period of time when she may be required to make withdrawals) make sure you don't see something there that is actually against what is in her best interest and is only done to make him a comission. You need to see that prospectus.  I just met with some potential new clients today that wanted me to take a look at their investments.  Turns out they had two separate annuities.  One was a variable annuity with Allianz.  The other was with some company named Midland Insurance (can't remember the whole name). Turns out the Allianz VA has a 10 year surrender contract and the Midland has a 14 year contract.   14 years!!!   They are currently in year 7 and if they need any money (I'm hoping they at least have a 10% free withdrawal) they will pay 6% surrender on the Allianz and a 15% surrender on the other. Ironically enough, they guy who sold this to them is now in jail.   No joke.
"The standard interpretation of ""can I afford to retire"" is ""can I live on just the income from my savings, never touching the principal."" To estimate that, you need to make reasonable guesses about the return you expect, the rate of inflation, your real costs -- remember to allow for medical emergencies, major house repairs, and the like when determining you average needs, not to mention taxes if this isn't all tax-sheltered! -- and then build in a safety factor. You said liquid assets, and that's correct; you don't want to be forced into a reverse mortgage by anything short of a disaster. An old rule of thumb was that -- properly invested -- you could expect about 4% real return after subtracting inflation. That may or may not still be correct, but it makes an easy starting point. If we take your number of $50k/year (today's dollars) and assume you've included all the tax and contingency amounts, that means your nest egg needs to be 50k/.04, or $1,250,000. (I'm figuring I need at least $1.8M liquid assets to retire.) The $1.5M you gave would, under this set of assumptions, allow drawing up to $60k/year, which gives you some hope that your holdings would mot just maintain themselves but grow, giving you additional buffer against emergencies later. Having said that: some folks have suggested that, given what the market is currently doing, it might be wiser to assume smaller average returns. Or you may make different assumptions about inflation, or want a larger emergency buffer. That's all judgement calls, based on your best guesses about the economy in general and your investments in particular.  A good financial advisor (not a broker) will have access to better tools for exploring this, using techniques like monte-carlo simulation to try to estimate both best and worst cases, and can thus give you a somewhat more reliable answer than this rule-of-thumb approach. But that's still probabilities, not promises. Another way to test it: Find out how much an insurance company would want as the price of an open-ended inflation-adjusted $50k-a-year annuity. Making these estimates is their business; if they can't make a good guess, nobody can. Admittedly they're also factoring the odds of your dying early into the mix, but on the other hand they're also planning on making a profit from the deal, so their number might be a reasonable one for ""self-insuring"" too. Or might not. Or you might decide that it's worth buying an annuity for part or all of this, paying them to absorb the risk. In the end, ""ya pays yer money and takes yer cherce.""" "I think you want to look at companies that buy annuities and give you a lump sum.   They exist to do this for lawsuit payments, lottery winnings, etc. I'm not sure what the fees would be on a relatively small payout of $6K but try searching for ""converting annuity to cash"" and the first several hits were all firms looking to buy structured payment settlements for a lump sum. They make their money by paying less than the present-day value of the annuity, so you will get less money this way than collecting your payments slowly." Pension in this instance seems to mean pension income (as opposed to pension pot). This money would be determined by whatever assets are being invested in. It may be fixed, it may be variable. Completely dependant on the underlying investments. An annuity is a product. In simple terms, you hnd over a lump sum of cash and receive an agreed annual income until you die. The underlying investment required to reach that income level is not your concern, it's the provider's worry. So there is a hige mount of security to the retiree in having an annuity. The downside of annuities is that the level of income may be too low for your liking. For instance, £400/£10,000 would mean £400 for every £10,000 given to the provider. That's 4% and would take 25 years to break even (ignoring inflation, opportunity cost of investing yourself). Therefore, the gamble is whether you 'outlive' the deal. You could hand over £50,000 to a provider and drop dead a year later. Your £50k got you, say, £2k and then you popped your clogs. Provider wins. Or you could like 40 years after retiring and then you end up costing the provider £80k. You win. Best way to think of an annuity is a route to guaranteed, agreed income. To secure that guarantee, there's a price to pay - and that is, a lower income rate than you might like. Hope that was the kind of reply you were hoping for. If not, edit your OP and ask again. Chris. PS. The explanation on the link you provided is pretty dire. Very confusing use of the term 'pension' and even if that were better, the explanation is still bad due to vagueness. THis is much better: http://www.bbc.co.uk/news/business-26186361 "Everything you are doing is fine. Here are a few practical notes in performing this analysis: Find all the primary filing information on EDGAR. For NYSE:MEI, you can use https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0000065270&type=10-K&dateb=&owner=exclude&count=40 This is the original 10-K. To evaluate earnings growth you need per share earnings for the past three years and 10,11,12 years ago. You do NOT need diluted earnings (because in the long term share dilution comes out anyway, just like ""normalized"" earnings). The formula is avg(Y_-1+Y_-2+Y_-3) / is avg(Y_-10+Y_-11+Y_-12) Be careful with the pricing rules you are using, the asset one gets complicated. I recommend NOT using the pricing rules #6 and #7 to select the stock. Instead you can use them to set a maximum price for the stock and then you can compare the current price to your maximum price. I am also working to understand these rules and have cited Graham's rules into a checklist and worksheet to find all companies that meet his criteria. Basically my goal is to bottom feed the deals that Warren Buffett is not interested in. If you are interested to invest time into this project, please see https://docs.google.com/document/d/1vuFmoJDktMYtS64od2HUTV9I351AxvhyjAaC0N3TXrA" You need to check how much of the total is deductible. It's something less than 100%. Your annual payment received is partially tax free as a return of principal, as with any fixed immediate annuity.  What's tough, is that rates are so low today that locking in any fixed annuity type product can be disappointing long term. In the end it's the fixed annuity you should compare to, and to that, add on the tax perks. Since you are trying to compare corporate bonds that have a defined coupon over the specified time of the bond. Why not use a simple Net Present Value (NPV) calculation. Refer: Net Present Value (NPV) You could use the discounting factor as the current repo rate of your central bank. As I said, this would be a simple fast measure (not considering risk rating of the bonds, inflation and other considerations). Take a notional 1000 as invetment in each instrument and calculate the NPV, higher it is better the investment. Another method, in terms of percentage return would be Internal rate of Return (IRR). Though the calcualtionis a bit more complicated, it would give you a percentage figure. Note, the above 2 measures are used when the cashflow over the time period is known. It will not work for instruments where the cashflow/value over different time are not known. Like stocks. "Re. question 2 If I buy 20 shares every year, how do I get proper IRR? ... (I would   have multiple purchase dates) Use the money-weighted return calculation: http://en.wikipedia.org/wiki/Rate_of_return#Internal_rate_of_return  where t is the fraction of the time period and Ct is the cash flow at that time period. For the treatment of dividends, if they are reinvested then there should not be an external cash flow for the dividend.  They are included in the final value and the return is termed ""total return"".  If the dividends are taken in cash, the return based on the final value is ""net return"". The money-weighted return for question 2, with reinvested dividends, can be found by solving for r, the rate for the whole 431 day period, in the NPV summation. Now annualising And in Excel" Edited to incorporate the comments elsewhere of @Atkins Assuming, (apparently incorrectly) that duration is time to maturity: First, note that the question does not mention the coupon rate, the size of the regular payments that the bond holder will get each year.  So let's calculate that. Consider the cash flow described.  You pay out 1015 at the start of Year #1, to buy the bond.  At the end of Years #1 to #5, you receive a coupon payment of X.  Also at the end of Year #5, you receive the face value of the bond, 1000.  And you are told that the pay out equals the money received, using a time value of money of 4.69% So, if we use the date of maturity of the bond as our valuation date, we have the equation: Maturity + Future Value of coupons = Future value of Bond Purchase price 1000 + X *( (1 + .0469)^5-1)/0.0469 = 1015 * 1.0469^5 Solving this for X, we obtain 50.33;  the coupon rate is 5.033%.  You will receive 50.33 at the end of each of the five years.   Now, we can take this fixed schedule of payments, and apply the new yield rate to the same formula above;  only now, the unknown is the price paid for the bond, Y. 1000 + 50.33 * ((1 + 0.0487)^5 - 1) / .0487 = Y * 1.0487^5 Solving this equation for Y, we obtain: Y = 1007.08 "A bit strange but okay.  The way I would think about this is again that you need to determine for what purpose you're computing this, in much the same way you would if you were to build out the model. The IPO valuation is not going to be relevant to the accretion/dilution analysis unless you're trying to determine whether the transaction was net accretive at exit. But that's a weird analysis to do. For longer holding periods like that you're more likely to look at IRR, not EPS. EPS is something investors look at over the short to medium term to get a sense of whether the company is making good acquisition decisions. And to do that short-to-medium term analysis, they look at earnings.   Damodaran would say this is a shitty way of looking at things and that you should probably be looking at some measure of ROIC instead, and I tend to agree, but I don't get paid to think like an investor, I get paid to sell shit to them (if only in indirect fashion). The short answer to your question is that no, you should not incorporate what you are calling liquidation value when determining accretion/dilution, but only because the market typically computes accretion/dilution on a 3-year basis tops. I've never put together a book or seen a press release in my admittedly short time in finance that says ""the transaction is estimated to be X% accretive within 4 years"" - that just seems like an absurd timeline.  Final point is just that from an accounting perspective, a gain on a sale of an asset is not going to get booked in either EBITDA or OCF, so just mechanically there's no way for the IPO value to flow into your accretion/dilution analysis there, even if you are looking at EBITDA/shares. You could figure the gain on sale into some kind of adjusted EBITDA/shares version of EPS, but this is neither something I've ever seen nor something that really makes sense in the context of using EPS as a standardized metric across the market. Typically we take OUT non-recurring shit in EPS, we don't add it in. Adding something like this in would be much more appropriate to measuring the success of an acquisition/investing vehicle like a private equity fund, not a standalone operating company that reports operational earnings in addition to cash flow from investing. And as I suggest above, that's an analysis for which the IRR metric is more ideally situated.  And just a semantic thing - we typically wouldn't call the exit value a ""liquidation value"". That term is usually reserved for dissolution of a corporate entity and selling off its physical or intangible assets in piecemeal fashion (i.e. not accounting for operational synergies across the business). IPO value is actually just going to be a measure of market value of equity." The equation is the same one used for mortgage amortization.  You first want to calculate the PV (present value) for a stream of $50K payments over 20 years at a10% rate.  Then that value is the FV (future value) that you want to save for, and you are looking to solve the payment stream needed to create that future value. Good luck achieving the 10% return, and in knowing your mortality down to the exact year. Unless this is a homework assignment, which need not reflect real life.  Edit - as indicated above, the first step is to get that value in 20 years:  The image is the user-friendly entry screen for the PV calculation. It walks you though the need to enter rate as per period, therefore I enter .1/12 as the rate. The payment you desire is $50K/yr, and since it's a payment, it's a negative number. The equation in excel that results is: =PV(0.1/12,240,-50000/12,0) and the sum calculated is $431,769 Next you wish to know the payments to make to arrive at this number:  In this case, you start at zero PV with a known FV calculated above, and known rate. This solves for the payment needed to get this number, $568.59 The excel equation is: =PMT(0.1/12,240,0,431769) Most people have access to excel or a public domain spreadsheet application (e.g. Openoffice). If you are often needing to perform such calculations, a business finance calculator is recommended. TI used to make a model BA-35 finance calculator, no longer in production, still on eBay, used.  One more update- these equations whether in excel or a calculator are geared toward per period interest, i.e. when you state 10%, they assume a monthly 10/12%. With that said, you required a 20 year deposit period and 20 year withdrawal period. We know you wish to take out $4166.67 per month. The equation to calculate deposit required becomes - 4166.67/(1.00833333)^240= 568.59  HA! Exact same answer, far less work. To be clear, this works only because you required 240 deposits to produce 240 withdrawals in the future. Maryland treats income from pensions and annuities in the same manner that the federal government treats such income. Consequently, pensions and annuities can be subject to Maryland's income tax. The resident booklet for Maryland income tax filers states on page 4: Line 1d. Enter on line 1d the total amount of pension, IRA,   and annuities reported as income on lines 15b and 16b of your   federal Form 1040, or lines 11b and 12b of your federal Form   1040A. Line 1 of Maryland's tax return represents total taxable income, before deductions, exemptions, and adjustments. Line 16b of federal Form 1040 represents the taxable portion of your FERS annuity. Consequently, the federally taxable portion of your FERS annuity is also subject to Maryland's state income tax. The taxable portion of FERS annuities should be recorded on the 1099-R you receive. If it's not, IRS pub 721 records how to calculate the taxable portion of FERS annuities. Maryland does, however, allow filers to exclude up to $29,200 of the taxable portion of their pension income in 2015 from taxable income if: a. You were 65 or over or totally disabled, or your spouse was   totally disabled, on the last day of the tax year, AND b. You included on your federal return taxable income received   as a pension, annuity or endowment from an “employee   retirement system” qualified under Sections 401(a), 403 or   457(b) of the Internal Revenue Code. [A traditional IRA, a   Roth IRA, a simplified employee plan (SEP), a Keogh plan, an   ineligible deferred compensation plan or foreign retirement   income does not qualify.] You mention receiving SS disability, so you may be eligible for that exclusion. Regarding what kinds of disabilities qualifies for those exclusions, Maryland states that: To be considered totally disabled, you must have a mental or physical impairment which prevents you from engaging in substantial gainful activity. You must expect the impairment to  be of long, continued or indefinite duration or to result in your death. You must attach to your return a certification from a qualified physician stating the nature of your impairment and that you are totally disabled. If you have previously submitted a physician’s certification, attach your own statement that you are still totally disabled and that a physician’s certification was submitted before. If you feel you would qualify for that exclusion (and have the required supporting evidence), fill out the relevant table and include the result on line 10 of your Maryland tax return. In the future, to avoid a large state tax bill due to inadequate withholding on pension funds, OPM provides a web service which allows you to specify state tax withholding amounts on pension distributions. Until you find a job, I would recommend doing nothing more than a bank checking account or a checking and savings account.  Some alternatives, such as savings bonds, would be okay if you were perfectly sure you did not need the money in the next six months.  Consider working for a place such as McDonald's in the meantime. Once you have stable employment, there are two paths you could take.  The first is a bond fund.  It would provide fair market returns for the time between now and the collection of social security.  The second would be a traditional annuity.  You have to be careful with them.  If it sounds much better than what others are offering, it is probably a scam.  Your interest in an annuity is that it will pay you money for as long as you live.  If you live to be 105 you will still be getting payments.  A bond fund would have run out of money long ago by that time. The biggest thing for you right now is getting to when Medicare takes over from private health.  Looking for any job is important right now to preserve cash. Although I do not normally recommend annuities, I do with smaller amounts of cash.  It is unlikely you will ever recover this sum again and the time remaining to save is very short.  The greatest challenge with an annuity is regret.  You can't get the money back once you have turned it into an income stream.  On the other hand, it will last as long as you live. The only important caveat is that if you are in poor health, then the bond fund would be better for you because you may not live to be very old. "(1) I think the phrase ""Variable Annuity"" is a glowing red flag. A corollary to that is that any strategy that uses insurance for a purpose (e.g. tax avoidance) other than protecting against loss rates at least a yellow flag. (2) The other really obvious indicator is a return that is completely out of whack with the level of risk they are saying the investment has. For example, if someone promises a 10% annual return that is ""Completely Safe"" or ""Very low risk"", Run. (3) If it is advertised on tv/radio, or all your friends are talking about it at parties. Stay away. Example: Investing in Gold Coins or the hot Tech IPO. (4) The whole sales pitch relies on past returns as proof that the investment will do well without any real discussion of other reasons it will continue to to well. Beware the gambler's fallacy. (5) Finally, be very wary of anyone who has some sort of great investment plan that they will teach you if you just pay $X or go to their seminar. Fee based advice is fine, but people selling a get rich quick vehicle typically know the real way to get rich is to get suckers to pay for their seminars." "Just to clarify, In wikipedia when it says  It is defined as a market in which money is provided for periods longer than a year They are referring to the company which is asking for money. So for example the stock market provides money to the issuing company of an IPO, indefinitely. Meaning the company that just went public is provided with money for a period longer than a year. The definition in Investopedia basically says the same thing Wikipedia does it is just phrased slightly different and leaves out the ""for periods longer than a year"".  For example Wikipedia uses the term ""business enterprises"" and ""governments"" while Investopedia uses the term private sector and public sector, in this context ""business enterprise"" is ""private sector"" and ""governments"" is ""public sector""  So in the sense of the length debt is issued yes, money market would be the opposite of a capital market but both markets still offer a place for governments and companies to raise money and both are classified as financial markets." Off the top of my head, a broker: While there are stock exchanges that offer direct market access (DMA), they (nearly) always want a broker as well to back the first two points I made.  In that case the broker merely routes your orders directly to the exchange and acts as a custodian, but of course the details heavily depend on the exchange you're talking about. This might give you some insight: Direct Market Access - London Stock Exchange