{"id":16972,"date":"2019-09-25T00:23:40","date_gmt":"2019-09-25T04:23:40","guid":{"rendered":"https:\/\/lifeinsurance-orleans.ca\/Life-Insurance-Blog\/lack-of-inflation-adjustment-a-problem-for-annuity-holders\/"},"modified":"2019-09-25T00:23:40","modified_gmt":"2019-09-25T04:23:40","slug":"lack-of-inflation-adjustment-a-problem-for-annuity-holders","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2019\/09\/25\/lack-of-inflation-adjustment-a-problem-for-annuity-holders\/","title":{"rendered":"Lack of inflation adjustment a problem for annuity holders"},"content":{"rendered":"\n
<\/div>\n

Considering how long people can survive after retirement, it only makes sense to think about how inflation could affect their expenses through the decades. By extension, any financial plan that relies on guaranteed lifetime income through annuities should account for rising costs of living.<\/p>\n

But as David Blanchett, head of retirement research for Morningstar Investment Management, recently wrote in a column for the Wall Street Journal<\/em>, an overwhelming majority of annuities do not include a cost-of-living adjustment (COLA) to help account for inflation.<\/p>\n

\u201c[M]ost have payouts that are constant over time (commonly referred to as nominal)–even though nominal payouts can result in a significant decline in purchasing power for a retiree,\u201d he wrote.<\/p>\n

Annuities that do take inflation risk into account generally do it in two ways. Some explicitly consider inflation by having payments that are tied directly to inflation, ensuring that a retiree will always have some constant amount available to spend, in today\u2019s dollars, throughout their retirement.<\/p>\n

\u201cAnnuities linked to inflation are still relatively rare, though, with only about 0.2% of annuities quoted in 2018 including the option,\u201d Blanchett said.<\/p>\n

The other approach is to implicitly consider inflation through a \u201cfixed\u201d COLA. Annuities that favour this approach increase their benefit by some fixed percentage every year, he said, with 2% being the most common fixed COLA among annuities quoted today. Because fixed COLAs aren\u2019t directly coupled to inflation, the growth in benefits associated with these annuities could differ materially from increase in expenses that one sees in retirement.<\/p>\n

\u201cOnly about 4% of annuities quoted in 2018 included any kind of fixed COLA,\u201d Blanchett said. \u201cTaken together, less than 5% of immediate and deferred annuities quoted in 2018 included any type of cost of living adjustment.\u201d<\/p>\n

Noting that the percentage of annuities with COLA considered is \u201cway too low,\u201d he argued that higher initial payout rates could be a reason for the lack of uptake. Based on annuity quotes he prepared for a 65-year-old female on August 27, he said that the initial payout rate for a nominal immediate annuity topped out at 6.03%. In contrast, an immediate annuity with a 2% COLA had a maximum payout rate of 4.7%, and an immediate annuity with benefits linked to inflation had a 3.82% maximum payout rate.<\/p>\n

\u201cWhile the initial payout rate for annuities with COLA is clearly lower than the basic nominal annuity (with constant payments) that doesn\u2019t mean COLA is a bad deal for retirees,\u201d he noted. Retirees must be made aware of how factors such as life expectancy, realized inflation levels, and risk tolerance will influence the true value, and how well payout amounts satisfy what they are trying to accomplish.<\/p>\n

\u201cModeling and discussing the implications of inflation is a critical component of a financial plan, since inflation can have a material impact on a retiree\u2019s standard of living,\u201d he said. \u201cThe fact that relatively few annuity quotes today provide any type of COLA is a point of concern.\u201d<\/p>\n

Read the original article at https:\/\/www.lifehealthpro.ca\/rss\/ <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Considering how long people can survive after retirement, it only makes sense to think about how inflation could affect their expenses through the decades. By extension, any financial plan that relies on guaranteed lifetime...<\/p>\n","protected":false},"author":578,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/16972"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/578"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=16972"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/16972\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=16972"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=16972"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=16972"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}