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Does Your Annuity Lose Money from Inflation?

Written by Leonard Ohanian L.U.T.C.F

All you baby-boomers or soon-to-be retirees depending upon a supplemental income to their Social Security retirement benefits are searching for financial ways to enhance their long and rewarding life. Many consider annuities as an option for this purpose. A terrific idea….but, did you know that the annuity you buy as a way to supplement your retirement income may be losing money due to inflation?

As you know, annuities are insurance agreements issued by a company who promises a fixed dollar payment to you as the holder. Although these are a great source of guaranteed payments for the duration of your life, they are not protected from erosion by inflation. Yes, Social Security benefits basically provide such a payment, by taking into account an annual cost-of-living adjustment.  However, these payments generally are not enough to support the financial needs of most.

To provide an eye-opening example of this type of deterioration, imagine you are 65 years old and you are receiving $1,000 per month. Based on past years, let’s assume the inflation rate is about 4% per year. By the time 10 years have passed, that $1,000 is now worth $675.00. Another 10 years and it’s now decreased to $456.00.

How can you protect your investment from the effects of inflation? There are inflation-indexed annuities that guarantee a real rate of return called IPAs and several companies have them available.

Keep in mind while searching for that right investment that there are many payment options: a Lifetime Annuity makes payments to you for your lifetime; a Lifetime Annuity/Guaranteed Years, will provide payments to you for a guaranteed minimum number of years, reverting to the beneficiary upon demise of the holder; or a Joint and Survivor Annuity, will make payments to you and a joint beneficiary for your lifetime and upon the demise of one of these partners, the benefits revert to the survivor. Lastly, is the Joint and Survivor Annuity Guaranteed Years, that basically is the same as the previous, but adds a guarantee of a minimum number of years payments.

Now, why is this option so unpopular? It all comes down to two reasons. One, is that insurance companies need to match the length with duration of the IPA contract, thereby lowering the risk and offering competitive payments to you. Number two, is simply immediate gratification versus long run benefit. Your initial payments from an insurance company will be 20 to 30% lower at first. But…in seven to nine years the payments will outdistance inflation and surpass the payments of an immediate annuity!

Think about it! By resisting the urge to have an immediate larger payment, worries about long-term financial support are eased and that dream of living a long, healthy fulfilled life is that much closer to being achieved!

About Leonard Ohanian: I specialize in wealth transfer and wealth preservation. With over 23 years in my profession, I have helped clients from all walks of life to save thousands of dollars by helping them to protect their assets from debt, taxes and the volatility of financial markets. In addition I have given them peace of mind by providing them a lifetime income which cannot be outlived as well as securing them a tax free retirement and by placing millions of dollars in life insurance protection. Call 248-345-8889 today for a free consultation!!!

Annuity123 is an educational platform only.  Annuity123 does not offer insurance, investment, or tax advice.  You should always seek the guidance of qualified and licensed professionals concerning insurance, investment, or tax matters.

 

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