TIPS Ladder vs. Annuity Calculator
Compare a TIPS ladder imported from TIPSLadder.com against a period-certain annuity or a lifetime annuity (SPIA). The calculator answers two questions: at what inflation rate does the ladder become the better buy, and for a lifetime annuity, how long you must live for the annuity to come out ahead.
What This Calculator Does
A TIPS ladder and an annuity both turn a lump sum into a stream of income, but they make opposite bets. A ladder of Treasury Inflation-Protected Securities pays an income that keeps its purchasing power whatever inflation does, for a fixed number of years. A typical annuity pays a fixed dollar amount, which usually starts higher and then buys a little less every year.
This calculator puts the two on the same footing. It works out the real return your ladder locks in from its actual year-by-year cash flows, then values the annuity's payments at that same return. If the payments are worth more than the premium, the annuity is ahead; if less, the ladder is.
If you are also weighing a pension offer, the pension vs. lump sum calculator asks a closely related question, and the Social Security calculator covers the inflation-adjusted lifetime income most people already have.
How to Use This Calculator
- Build a ladder at TIPSLadder.com and export the Funded Years table as CSV, then import it here. A sample ladder is loaded until you do.
- Check the purchase cost. The ladder's real return is worked out from it.
- Choose Period certain or Lifetime (SPIA) and enter the premium, monthly payment and first payment year from your quote.
- For a lifetime annuity, enter the annuitant's age and sex, any guaranteed period, and a second person if it is a joint contract.
- Set the inflation you expect and read the two breakeven figures at the top of the results.
- Change the inflation rate, or move the age-at-death slider, to see how firmly the answer holds.
Frequently Asked Questions
What is the breakeven inflation rate?
It is the average inflation rate at which the annuity and the TIPS ladder are worth the same. A ladder's income rises with inflation and an annuity's usually does not, so higher inflation favors the ladder. If you expect inflation to average more than the breakeven, the ladder is the better buy; if less, the annuity is.
What is the breakeven longevity age?
For a lifetime annuity, it is the age the annuitant must reach for the annuity to have paid back its premium in today's dollars, valued at the return the ladder would have earned. Die sooner and the ladder was the better buy, because its unmatured bonds pass to your heirs. Live longer and the annuity wins, and keeps winning every year after.
Why does the calculator need the ladder's purchase cost?
The comparison is built on the real return your ladder locks in, and that return is found from two things: what the ladder costs today and the income it pays each year. The Funded Years CSV from TIPSLadder.com normally includes the cost of each bond, and the calculator adds them up. You can correct the total if your actual cost differs.
How are the two compared if they cost different amounts?
Each is judged per dollar of its own cost. The annuity's payments are valued at the ladder's real return and compared with the annuity's premium, so a ladder that costs less or more than the annuity does not tilt the result. Where the running totals are charted, the cheaper purchase starts with the cash it leaves in hand.
Is the expected return on a lifetime annuity guaranteed?
No. Only the payments inside a guaranteed period are certain. The expected return is an average across everyone who buys the contract, weighting each payment by the chance the annuitant is alive to receive it. Any one buyer will do better or worse than that depending on how long they live, which is why the calculator shows the guaranteed, single-scenario and expected figures separately.
Which mortality table does the calculator use?
The Social Security Administration's period life table, by age and sex. It describes the general population. People who buy annuities tend to be healthier and live longer than average, so the expected figures here understate what a typical annuity buyer collects and lean slightly against the annuity.
How does a joint-life annuity change the comparison?
A joint contract keeps paying while either person is alive, at the full amount while the annuitant lives and at the survivor percentage afterward. That makes it worth more than a single-life contract at the same payment, and it brings the longevity breakeven forward, because the second life can carry the contract past its premium even if the annuitant dies early.
What does this comparison leave out?
Taxes, the credit risk of the insurer, and the fact that a ladder can be sold while an annuity generally cannot. TIPS are backed by the U.S. Treasury; an annuity is backed by an insurance company and, up to a limit, a state guaranty association. The calculator compares cash flows before tax and treats both as certain to be paid.