According to Annuity.org, a typical rate for a 10-year annuity right now is about 3.7%. That means, if you were to put $100,000 into this hypothetical annuity, you’d end up with $143,809 in ten years.
According to ycharts.com the 10-year U.S. Treasury note currently yields 3.25%. That’s not as much as the annuity, so your $100,000 investment wouldn’t do quite as well. But, what if you’d be happy with taking a risk that you wouldn’t gain as much as long as you wouldn’t lose anything? At 3.25%, you could deposit $72,627 into our hypothetical treasury note and it would be guaranteed to grow to $100,000, thus guaranteeing your principal. Since you deposited only $72,627, you have $27,373 left to invest in stocks for a 10-year period.
If your stocks averaged 8% (below the historic long-term average annual growth rate of 10%), your stocks would grow to $59,096, giving you a total return of 4.75% on your combined $100,000 investment. If your stocks grew by 9%, they would end up at $64,801, giving you a combined return of 5.10%.
So, you can have a guarantee of $143,809 in ten years with an annuity; or you can take door #2 that guarantees you against loss, but could provide you with an unknown gain.
Both are taxable at the end, though stocks are more likely to enjoy some capital gains treatment when sold. And, both strategies must battle inflation.
No free lunch.
Jim
