Annuities and the Issue of Inflation
September 19, 2008
Inflation is a subtle, but nasty, factor that eats away at the value of your money over time. There are certain annuities designed to counter this loss of value.
One of the givens of the economic reality is the fact that the purchasing power of money declines as time goes on. This is known as inflation which indicates that the value of the money has inflated. It does not buy as much as it used to buy. This fact concerns people interested in annuities. It is especially true in the case of a long term fixed annuity. This problem is common to all fixed incomes. You are getting the same amount of money, but it is buying less and less.
The problem is not as acute with a variable annuity. The chance to make some extra earnings on the invested money counters the effects of inflation to some degree. This is not a satisfactory result for most people. They rightfully realize that inflation is eating up their earnings in their annuity in the same manner it is cutting into their earnings elsewhere. There is a good solution to the problem of inflation. It is the inflation proof annuity.
The inflation adjusted annuity is a name given to an index based annuity that uses the Retail Price Index (RPI) as the basis for the annuity payout increases. The Retail Price Index is considered one of the most accurate indicators of the true purchasing power of money. The annuity starts with a basic payout amount. It might have a pre-set interest rate that gradually increases the payout. When the RPI moves up, this interest rate increases also. In many cases, a decrease in the RPI would lead to a decrease in the interest rate that determines the payouts. This decrease would be most unlikely given the inflationary history of the RPI, but even if your payouts decreased a little bit, it would be during a period of lower costs. The idea is that your purchasing power remains the same.
The product is ideal for long term retirement or estate planning purposes. The risks of investment are already largely assumed by the Insurance Company that sells the annuity and now the Insurance Company is going to assume the risk of changing economic conditions as well. One of the best features of the annuity is the reliability of the regular schedule of payouts. When these payouts are being automatically adjusted to the inflation rate, this feature becomes even more attractive.
The annuity market has many different options. Your Insurance Agent will be able to help guide you through the complexities and steer you toward the options that best suit your needs and your financial goals. When you are exploring the various options, be sure to ask about the inflation adjusted annuity. Sadly, the fact that your money is going to buy less in the future than it can buy today is one of the most sure things in the entire financial world. The inflation adjusted annuity is one good way to control this fact.
Read more annuity information at UFCAmerica.com.
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