Inflation And Retirement Income: SPIAs Can Help

Retirees and those soon to retire depend on these services as much as any other demographic and must find ways to cover these higher costs now, during low interest rates and high equity market volatility, while preparing for future inflated costs. Additionally, they need to accomplish this while potentially not working or receiving a steady stream of income.

Annuities may be the solution retirees are looking for. A single premium immediate annuity may allow an investor to begin receiving an income stream, either for life or for a determined number of years, within a month of purchase. (All guarantees are based on the claims-paying ability of the issuer.) This income stream helps solve a retirees most pressing concerni.e., to create a steady and reliable source of income to help cover current costs.

But what about the impact inflation has on future expenses? This is clearly a concern for many retirees as they have the potential to live as long in retirement as they did during their working years.

In this scenario, inflation could reduce purchasing power quite substantially. Even projecting last years relatively low average inflation rate of 2.6% into the future, $100 today would only purchase $46.30 in goods and services in 30 years. Look into the rearview mirror, however, and things look much bleaker: $100 in 1971 and 1961 was reduced in purchasing power to $22.80 and $17.39 respectively by the end of 2001.

In todays bearish economy, investors rightfully are concerned about equities being the long-term solution to outpace inflation as they have been in the past.

Most experts believe they are, but tell that to investors who have seen three straight years of equity declines. The question now becomes, “How do I get the equity return exposure for my long term needs while protecting my future income source?” The answer may lie in a variable annuity that offers a guaranteed minimum income benefit rider.

A deferred variable annuity is a long-term investment product where capital gains, dividends and interest accumulate tax deferred. Most variable annuities offer a variety of investment options that allow investors to custom tailor a portfolio to meet their needs.

For those products offering living benefits, an investor can elect the GMIB rider for an additional charge^. This may be appropriate for investors looking to maximize future income protection.

Lets assume an investor purchases a variable annuity for $100,000 and elects a 5% roll-up GMIB at issue (the most common GMIB in the industry). At the end of year 10 (most GMIBs require a waiting period prior to annuitization), the GMIB value would equal $162,990, assuming no distributions were taken.

Whats important here is that this is the worst-case scenario. Since the investor knows the GMIB rider is protecting his/her future income source, the investor is able to invest according to personal needs without fear of jeopardizing future income.

As an added bonus, the investment has the potential to exceed the guaranteed returns offered by the GMIB feature, particularly because the investor is not shying away from the equity exposure suited to their financial objectives.

These are uncertain times. Why not consider adding some certainty to your clients current and future income source with a combination of a single premium immediate annuity and a variable annuity (with GMIB rider).

Scott C. Curran, ChFC, CLU, CLTC, is president of The Curran Group, Little Falls, N.J., a member of the executive committee of the Mass Mutual Agents Association, and chairman of the associations accumulation products committee-annuites and retirement matters. You can e-mail him at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.