Are Inflation-Protected Annuities Right For You?
Inflation hit its lowest level in the 2010s in July of 2016 with a 0.8 percent inflation rate. However, in less than a year, that rate has inflated up to 2.7 percent in February of 2017.
With such fluctuation present with inflation, it is wise for investors to consider products that keep pace with rising inflation rates.
Luckily there are some investments, such as inflation-protected annuities, which as the name suggests can protect your product against rising inflation rates. Generally, these products are indexed to inflation based on annual cost-of-living-adjustment factors.
This allows for increases in the annuity rate-of-return, or more often an increase for guaranteed monthly income payments.
Because the rates fluctuate so much, it is a good bet to just go with what the historical average annual inflation rate, which is 3.22%, according to InflationData.com. This data goes back to 1913 when the US Government began keeping records of the rate.
This means that for your investment product to make an annual rate of return of just 1%, it would need to generate 4.22% in total.
Again, these products make the most sense when negotiating the product rate guideline with the historical average inflation rate as opposed to the rate at the time of signing. Had you purchased one of these products in July of 2016 and negotiated with the rate at the time of signing – 0.8% - then the product would not have protected you against the dramatic 270% rise in the inflation rate. But going with the historical average, even with the dramatic rise in inflation over the last few months, you would still be protected.
There are other factors to consider such as any extra costs or fees associated to get these added features. Therefore it is best to contact an advisor and get an informed strategy on whether inflation-protected annuities are the right product for you, as well as getting rate and fee comparisons. Talk with the advisor and see if the benefits outweigh any negative upfront fees. Sometimes it is better to consider other retirement investments in conjunction with an annuity to counter inflation as well as getting a decent return.