Combating Inflation with Annuities
03/06/2012 12:08 pm EST
You can set up a lifetime income stream that grows each year, so you can fight creeping prices and enjoy further peace of mind, writes Stan Haithcock of Stantheannuityman.com.
There is one constant concern that I hear when people are discussing their current or future income stream…inflation.
We all know that it is not a question of if, but when inflation is going to rear its ugly head. Most of us are realizing that inflation is already upon us. Go fill up your car, then drive to your local grocery store and ask yourself if inflation is real and here right now.
Oh yeah, I forgot…our wonderful government doesn’t even factor in gas or food prices when looking at their CPI/Inflation calculations. Please! Give me a break!
At the end of the day, we all need income that we cannot outlive, and we need that income to hopefully adjust/increase for inflation. Some annuities are currently available that contractually solve this problem for your lifetime income stream by increasing annually.
There are two types of annuity lifetime income streams: immediate and target date (deferred). Both can provide an income stream that you cannot outlive, and both can increase your income stream annually as well to combat inflation. (Note: it is important to own the right annuities that solve for that contractually.)
Let’s break down the details of how an immediate lifetime income and a target date (deferred) lifetime income annuity can fight inflation.
If you need immediate income, the way to structure your lifetime income stream for inflation is by purchasing a Single Premium Immediate Annuity with a COLA (Cost of Living Adjustment) benefit rider attached to the policy. You can choose the contractual percentage increase that you want your income stream to grow by on an annual basis.
For example, if your Single Premium Immediate Annuity income stream is $12,000 per year and you have a 3% COLA attached to the contract, your income will increase by $360 the first year ($12,000 x 3% = $360). So your next year’s income would be $12,360.
The following year, that amount would again increase by 3% ($370.80), for a total of $12,730.80 in income, and so on. This increase is totally contractual, and will increase by the specified percentage every year for as long as you live.
There is also an immediate annuity available that will “reset” your lifetime income payment 5 years after the contract issue date if interest rates have drastically moved up during that time period. That’s new to the marketplace, demonstrating that insurance carriers are very aware that inflation increases need to be addressed.
My advice to clients is to structure your Single Premium Immediate Annuity as “Life with Cash Refund” or “Life with Installment Refund,” so that all of the money will go to you or your listed beneficiaries, not the insurance company. You can then choose the percentage COLA increase to attach to the contract.
If you are looking for your lifetime income stream to start “down the road,” then you can attach an Income Rider benefit to a deferred fixed annuity that addresses inflation. (Just a short side note: Income Riders on deferred annuities should only be placed on fixed annuities, not variable annuities. That rant is coming in a future article!)
Inflation Income Riders on a fixed deferred annuity work contractually in two ways. First, during the deferral years, the Income Rider will grow at a contractual rate while you are waiting to turn on the income stream. For example, if you have an Income Rider that grows contractually at 5%, your money will compound by that 5% as long as you defer (i.e., avoid touching the money).
Secondly, when you decide to turn on your lifetime income stream, the 5% rate will stop and your income stream will then lock in and grow on an annual basis by one of three choices: declared CPI increase, fixed-rate percentage increase, or an index percentage increase.
Currently, there are only two fixed, deferred hybrid-type annuities available that I am recommending to my clients to combat inflation.
So, if we all agree that inflation will “eat into” our future income streams, we then need to put a plan into place to have our lifetime income streams increase…contractually! Annuities, when structured properly, can “transfer the risk” (to the insurance company) of a lifetime income stream that grows over time.
A news reporter recently called me the National “Annuity Consumer Advocate” in the same vein as Ralph Nader and Clark Howard are for other products and services. I hope to continually educate the public on the complex and sometimes ugly world of annuities. That’s why I just published The Annuity Owner’s Manual, which fully explains in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. Click here for a free copy.