## What is an Annuity and How to Evaluate Retirement Annuity Plan?

The plan is also pretty “inflexible” as you are not allowed “redeem” your paid premium for the first 15 years in case of any financial emergency.

It is likely that most people will adopt a simplistic approach to calculate the return of this retirement annuity plan, assuming current age is 30 years.

Disregarding the time value of money, for a total invested amount of RM (500 x 12 x 15) = RM 90,000, you get back RM (4,000 x 30 + 73,000) = RM 193,000. Your response: 90k over 193k is a 46.6% return!

**Yes, 46.6% return in 45 years. You got to be kidding me.**

Here’s the correct way to calculate your return for this type of deferred retirement annuity, using **Internal Rate of Return (IRR)** in Microsoft Excel. I will guide you through step by step.

It should look something like the table on the left.

In any empty cell, type this formula: “=IRR(B2:B46,0.03)”

Select this cell, right click > “Format Cells…” > “Number” tab > “Percentage”

Change decimal places to “2”

You should get IRR = 2.89%

This means, the annualized effective compounded interest rate of return of this plan over the 45 years period is 2.89%.

Another way to put it:

The return per annum of your total cash inflows over your total cash outflows is 2.89 percent.

Ponder over this alternative:

The monetary return will be more than the aforementioned retirement annuity plan if today, a risk averse person locks RM 90,000 into a FD account with a constant interest rate of 3% for the next 45 years.

**Dear readers,**

**Do you think that retirement annuity plans are for those who are not sufficiently disciplined to manage their own expenses and investment?**

**If you have similar plan being offered to you by your insurance agent or banks, do let me know the details by leaving a comment below or at my Facebook page. We can analyze your case for the benefit of the masses.**

## This Post Has 8 Comments

## wiki.Creativecommons.org

29 Jun 2013I do not know whether it’s just me or if perhaps everybody else encountering problems with your site. It appears as though some of the written text on your content are running off the screen. Can someone else please comment and let me know if this is happening to them as well? This could be a issue with my internet browser because I’ve had this happen previously.

Many thanks

## LCF

26 Nov 2012Hi Edge

The 0.03 represent percentage, which is just an estimate. You see in Excel cell it says [guess]. You key in any values (0.04 for 4 percent, for instance) until you don’t get an error message in excel from this IRR formula. If your “guess” is too far from the answer, it will fail to compute (you see a DIV/0! error) because this IRR computation is really “calculation-intensive”.

In your case, yes, you got it right, IRR is 4.09% per annum. This is the return of your whole plan over the entire period considering all your cash outflows and inflows.

## edge

25 Nov 2012Can I know how come your formula is “IRR(B2:B46,0.03)”?

How to get the 0.03?

I just received a new Annuity Plan plan.

I 35 now.

Need give RM 3,000 for 10 years from my age 35-45.

And start to get back RM 4,665 from 55-70 years.

The IRR is 4%?

If I calculate based on your formula.

Thanks for advice 🙂

## LCF

22 Nov 2011I agree. I simplified it for simplicity purpose :). Mind to share w/ me the more fancier type?

When the Sukuk bonds come out, be sure to blog it; I am interested too. Sounds that from your experience Sukuk bonds are pretty positive.

## Kris

22 Nov 2011Yes. I have seen alot of these type of products. They are even more fancier type of products than your example.

But upon calculation, the real returns per years can barely beat the FD rates.

Better to wait for the Sukuk bonds. I am suspecting that it will come soon as the Govt needs some money from the rakyat the current economy and the hoohah development plans which we don't really have the money for 😛

Kris