How to Drive Through Inflation with an Indexed Annuity
You know you’re getting old when you are telling your children how much things used to cost. When I was a boy, my father used to moan when gas prices hit $0.30 a gallon. We sold our boat when gas prices skyrocketed to $0.40 a gallon. In 1980, a Porsche 911 cost $32,000. Today, the similar Porsche runs $151,000, which is a 371% increase! At that rate, in another 25 years, that same car will run $600,000.
Various driving conditions call for different tools, and the tires are different for driving on ice and snow versus driving on a race track. A Porsche pulling a 25-foot waterskiing boat is not very effective, while racing a Ford 350 diesel isn’t very good around the turns.
Index annuity contracts are no different. Some are stronger for growth, while others offer more options like LTC benefits, enhanced death benefits, or various annuitization options. The chassis on an annuity provides safety, protection, and various guarantees. What is not included in an indexed annuity is risk, high expenses or the related stresses that come with risky investments.
What about inflation? When an investor is driving an indexed annuity, as a driver, you need to be ready for inflation. Here are two simple ways to address inflation with an equity indexed annuity income rider.
1. Step up
2. Laddering
The income rider on your indexed annuity will guarantee you exceed the standard inflation rate of 3% during the growth stage of your annuity. What about during distribution? Typically, when an investor “turns on” the income for life, the income payments remain level, and these payments will last the rest of the owner’s life. The level benefit doesn’t address inflation.
There are several annuities that offer a step-up, which is an annual increase in lifetime income which steps up by a certain percentage. One particular contract steps up 3% each year once the income rider is activated. Another contract steps up each year in proportion with the capped index rate. If the index goes up, the income amount steps up accordingly.
Laddering. By utilizing two or more contracts at the same time, an annuity owner creates additional flexibility by allowing one bucket of money to continue to grow while another bucket is distributing funds. Instead of one contract with $500,000, two $250,000 contracts can address inflation even with a level-payout amount.
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