Inflation-Adjusted Annuity: Pros and Cons

Inflation-adjusted annuities pros and cons. The good news is you already own the best inflation annuity on the planet, Social Security. It is an annuity. And you're like, "No, it's not." I love those who call me up and say, "I hate annuities." They just call me up to pick a fight, "I hate annuities." I'm like, "You already own one, Fred." "No, I don't. Never would buy one." You've been contributing to it for a long time, it's called Social Security.

Social Security is a lifetime income stream. It's a guarantee. You can never outlive it. That's an annuity. That's what annuities do. Annuities are the only product on the planet that can do that.

‌The reason that I say Social Security is the best inflation annuity on the planet is that the increases to your income stream are a political football. It's the people in Washington deciding to increase the income stream at their whim because they love you voters out there, and the people who get Social Security—a lot of them—are voters. So, that's the reason it increases, and that's cool.

‌By the way, Social Security was never put on the planet as a primary source of lifetime income, even though it is for far too many people. It was not put on the planet for that, but people are using it for that. And in the current environment, it looks like politicians want a guaranteed income stream. I'm not sure how that's going to work or how we pay for that, but until then, you probably need more income. You probably need income to increase in your perfect scenario.

‌Return of Principal

‌Let's talk about how annuities do that. Can annuities increase your income stream over life, similar to Social Security? The answer is yes, but annuity companies don't give that away. Remember that lifetime income streams from annuities are a combination of return of principal plus interest based on your life expectancy at the time you take the payments.

‌Adding Increases

‌Now, let's just talk about how you can add increases, pros and cons. The pros to increasing your income for life are pretty basic. It's going to increase income, and that's always a good thing. But the life insurance companies that issue annuity contracts for lifetime income, like Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and Income Riders, are not giving that increase away.

‌For example, an Immediate Annuity. If you add a Cost-of-Living Adjustment rider increase, let's just say you say, "Stan, quote me the best Single Premium Immediate Annuity for me and the wife. We want it to start in 30 days from the policy being issued, and we want a 3% increase on that income every year." So, it's just going to continue to increase by 3% every year. That's fantastic. But visually, the same annuity without that COLA starts here. The same annuity with the COLA starts here income stream-wise. The annuity companies do not give that away. Just look at about a seven to nine-year breakeven point. Don't hold me to that, but just ballpark it from the standpoint of how long it will take for your COLA annuity to reach the same payment level as the non-COLA annuity that you could have purchased.

‌The question you have to consider is whether it is worth the increase in exchange for the lower payment amount. There is no good answer to that, just bad sales pitches.

‌In the current go-go world of annuity sales pitches and bad chicken dinner seminars and bad ads on the radio and horrible ads on television. I mean, seriously, it's like the wild, wild west out there, especially when it comes to Indexed Annuities. I have no problem with Indexed Annuities. I probably sell more Indexed Annuities than most. I'd say I sell more than 95% of the agents on the planet on Index Annuities, not because I'm enamored with an index call option. It's going to get you CD returns. That's what Indexed Annuities do. That's what they've historically done. That's what they were designed to do. But that's not how they're sold, unfortunately. They're sold as market return products, etc.

‌The Pitch

‌Now, a current group of products and carriers are out there, and the sales pitch goes like this. Before I say it, it's not true. So, just calm down because when I say it, you're going to be like, "That's it, Martha. That's exactly what I'm looking for." They'll say, "Okay, you buy the Indexed Annuity, and you get an Income Rider attached to it, and the income stream increases by whatever that index call option increases by." Stop. Stop. I know you want it; I know that's what you've been pitched, and there are agents out there that go, "That's exactly what I'm selling," well, you're selling it wrong there, Chester. Remember, even with Indexed Annuities, when they increase that income stream based upon this non-guaranteed index call option return, what do they do? Just remember this, if you walk away with one thing, remember this, not the frame of my face, not that, without an increase, with an increase. Income stream without an increase. Income stream with an increase. Same annuity, same annuity, same annuity, same annuity. Increase down here, no increase up here. It's that simple. Annuity companies don't give anything away.

‌Client Example

‌That doesn't mean that they're bad products. That doesn't mean that you could use them in combination with products that don't have an increase. I had a call the other day, and the guy said, "I've been pitched this, blah, blah, blah, da, da, da, this product that increases," and as soon as I told him how it worked, he was mad because he thought that the agent had misled him. Whatever, okay? Doubt it. I'm assuming that the agent just didn't know. He heard it from his wholesaler and then sold it like the wholesaler told him to sell it. But the bottom line is I said, "Hey, it's not a bad idea to take income streams without an increase and income streams with an increase and combine them. There's no reason why you wouldn't do that because you'll have one that's a static payment, and then you'll have one that's increasing, and then you'll have your Social Security payments that are increasing."

‌So, there are no perfect answers to it, but what you need to take away from everything regarding inflation-adjusted annuities pros and cons. The pros are obvious, the income's going to increase. The cons, the bad, and the limitations are that annuity companies don't give that away and will severely lower that income starting amount compared to the same annuity without that increase.

‌I hope you learned something today. I'm educating the public out there. I am America's top annuity agent. Why? Because I educate my clients before they make a decision. Remember this in closing: there's never an urgency to buy an annuity; it's just an urgency to learn about them, the good and the bad. And with that, I'll see you on the next Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.