How The Annuity Value is Recalculated Each Year
How The Annuity Value is Recalculated Each Year
While the number of units does not change from year-to-year, the dollar value of those units does change. The dollar value varies depending upon how well the collective assets in MMBB’s annuity fund perform.
The year-to-year change in the value of an annuity unit is what makes MMBB’s annuity variable as opposed to fixed. A fixed annuity pays its participants the same amount year over year; a variable annuity pays in varying amounts year to year.
Let’s consider a hypothetical example. You own 100 units. On September 30, when all outstanding units are divided into the value of the underlying assets, it is determined that the value of each unit is $50. Starting in January of the following year, your annual annuity will be $5,000: that’s 100 units times $50. On September 30 of the next year, it is determined that the unit price is $53. Starting in January of the following year, your annual annuity will be $5,300. That’s 100 units times $53.
The second thing to remember is that MMBB’s annuity, while variable, creates a soft landing when markets decline. MMBB limits the decline in the annuity payout value in any one year, regardless of how much the market declines.
How does this work? Again, using the same hypothetical figures: You own 100 units. On September 30, when all outstanding units are divided into the value of the underlying assets, it is determined that the actual value of each unit is now $45. Starting in January of the following year, you might expect that your annual annuity would be $4,500: that’s 100 units times $45. But MMBB limits the amount your annuity will decline in any given year, regardless of market performance, so the payout value of each unit for the following January would instead be set at $47.50.
Practically speaking, what this means is simple: your retirement income would decline only 5%, to $4,750 (100 units times $47.50)(for more information on how MMBB shields members from the full impact of a market decline, see “Limit on Annuity Payout Reductions” below). However, there would now exist a gap of $2.50 between what each unit is worth ($45) and what MMBB is paying out ($47.50). As you would imagine, closing this gap is important in ensuring the health of the Annuity Fund long-term.
Improvements in the economy and positive investment performance are two of the key factors that will determine how quickly any gap is subsequently closed. When the market declines significantly and the recovery is slow, such as now, investment experience may not be sufficient to close the gap. In this case, the MMBB Board of Managers may need to reduce the payout value again. This occurred between 2009 and 2011.
The MMBB Annuity Payout Gap Tracker chart allows you to follow the relationship between the actual value and the payout value of a unit in the Annuity Fund. It allows you to track MMBB’s effort to eliminate the gap through investment performance, as positive investment performance increases the value of the Annuity Fund assets. It also shows how MMBB has successfully cushioned our members from the full impact of the market downturn. The MMBB Annuity Payout Gap Tracker is updated on a monthly basis.