Inflation-Proof Your Income Stream
07/02/2012 11:00 am EST
Inflation-indexed annuities can protect investors’ income if prices soar, says the expert, Stan “The Annuity Man."
We’re talking inflation-adjusted annuities with Stan the Annuity Man.
Well, thanks. That’s the new thing in the annuity industry. Really, up until last year, the companies, when you turn on income stream, the income stream was static. It was never going to increase. You could put a cost of living adjustment rider on an immediate annuity, but that was adjusted downward on the initial payment.
What they’ve done with some of the deferred annuities is when you turn on the income stream; it will ratchet up with CPI or will ratchet up with an index increase.
Well, that’s a great idea, because especially in lower interest rate environment that we have now, when you’re looking for that income coming out and if we have a bounceback in inflation, then this provides a great safety net.
I mean, correct. People are living longer; their dollars are going to have to spend for more. It’s going to have to increase for life.
So, these products are going to increase for as long as they live. The CPI goes up every year for 30 years, their income’s going to increase and ratchet—meaning it’s going to lock in, never going below that amount, so that they’re going to have more dollars to spend.
Now, these products are fairly new, right?
They are new. Out of about the 1,000 annuities out there that we follow—and I represent 100 companies, I’m independent—there are about four that we like.
So, four out of 1,000 have kind of figured out actuarially how to do this, how to increase your income with inflation and not plan some accounting actuarial gains. It’s a true increase that you can see on your statement and in your check going into your bank account.
Now, are the fees different on this, or do they look different because they’re actually working a little bit harder to adjust?
The fees, ironically, are pretty much the same. What they do is when you start the income stream, your income stream might be a little bit lower when you start it, but when you have a lifetime increase for inflation, it’s going to more than make up for that.
For these annuities, are the minimums different than they would be for the regular annuities that aren’t inflation-adjusted?
Most annuities, and even the inflation-adjusted annuities, they really don’t require minimums. I think that’s good. So, everyone can access it.
It’s not for like the accredited investor, it’s for everybody. It’s Joe Q. Public that says, "You know what, I want my income stream to be for life. I want my income stream to be for life for me and my wife. And oh, by the way, I want it to increase with inflation every year."
And that—the increasing with inflation, are there any tax issues with that?
Well, taxes…when money comes out of an annuity for income, it’s taxed at ordinary levels. So, with the increase, you’re still going to have to pay taxes on the income.
One of the things that people always ask me is, Stan, what happens with hyperinflation? Are there products that are going to adjust for hyperinflation? My answer to that is probably no. The best product out there right now that will adjust for inflation will go up to 10% on a CPI increase. Past 10% they will not do any—they can’t actuarially back that up. But that’s still a pretty good deal.
Yeah, I mean, unless you’re living in Peru or something.
That’s correct. But for now, these are good products. We use fixed annuities, so there’s principal protection and you get the increase without the fluctuations of the market.
Right, and can we expect more of these to hit the market, or is this a boutique?
Well, absolutely you’re going to see more, because you’ve got 10,000 baby boomers retiring every day and…people have two concerns. The primary concern is outliving your money. The second concern is outliving your money or not having enough money even now that’s going to pay your for life.
So, yeah, you are seeing the actuaries within the insurance company’s trying to figure out how to logistically back these things up for people’s lives. And they’re living longer, so it’s not an easy thing to do, especially with rates where they are right now.