Issue 36.12
The guaranteed payments that annuities offer can help protect investors from troubled times, providing the value of the annuity isn’t being whittled away by inflation.
Many economists are worried about inflation. The Consumer Price Index (CPI), a widely used gauge of consumer spending, decreased 0.3% in May 2012, and core inflation (which eliminates volatile food and energy costs) rose 0.2%. For the one-year period ending May 31, 2012, the CPI rose 1.7% and core inflation rose 2.3%. That places core inflation above the U.S. Federal Reserve Board’s target of 2%.
Inflation can be problematic for annuity owners. That’s because the annuity payouts are dependent on interest rate levels at the time the money is invested.
One way to address this problem is to invest in an annuity that adjusts for inflation. Some annuities raise payments based on changes to the CPI; others raise payments by a fixed percentage per year; and still others increase payments only if interest rates rise by more than a certain percentage by a certain date.
While this may be appealing to many investors, there are downsides to inflation-protected annuities. First, inflation protection can add to the cost of the annuity. Second, inflation-protected annuities may offer lower initial payouts. Third, annuities that increase payments when inflation rises often also reduce payments when inflation declines.
Investors may therefore want to consider other ways to address this problem. One option: Consider investing in several immediate payment annuities at several points in time; this allows you to potentially capture different interest rates. Another option: Invest part of your assets in an annuity and part in stocks and bonds.
Of course, deciding which approach makes the most sense for you depends on your individual financial situation and tolerance for risk; we can help you make the choice that’s right for you.
Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. The IRS may also impose a 10% penalty on withdrawals prior to age 59 ½, depending on the circumstances.
David D. Polatis is a Certified Estate Planner at Senior Advantage and can be contacted at 435-986-9222.