Can Inflation be Addressed using Income Riders
Today, we will talk about the cost of living adjustment riders with income riders and products like Immediate Annuities, Deferred Income Annuities, etc. Don't listen to the sales pitches; listen to the facts.
Let's talk about inflation with income riders attached to Indexed Annuities because some people are calling me and saying, "Well, I went to this bad chicken dinner seminar" or went to a steak dinner seminar, which should give you the, by the way, what is the commission being paid if you're eating at a $50, ahead at a steakhouse, guess what, this person's going to make a lot of money. If they sell you this annuity, it doesn't make it bad; it’s just is what it is.
The Sales Pitch
But the sales pitch goes something like this: “If you sign the contract, Mr. Jones, you’ll get an upfront bonus, and the income from this Index Annuity will increase with inflation." Sounds good. Hey, I've got one for you. I've got a pill, and if you take it, you will have six-pack abs and be cut up. You're going to look like an Olympian. No, same thing. Let's go back a little bit. You're going to get an upfront bonus for signing that. If someone says that, upfront bonuses with annuities are candy for the stupid. You can't be that dumb. No philanthropist gets up at an annuity company and says, "You know what, I think I'm going to give money away today to random people across the country." No, no one's like that. It's 100 pennies on the dollar; the upfront bonus is just part of the overall contractual guarantee, but let's get to the real sizzle part of the sale.
I always tell people to buy the steak, not the sizzle. The sizzle is that the income from this Index Annuity will rise with inflation. No, sounds good to be true because it is. They're pitching an Index Annuity at the index option, which by the way, was put on the planet to create normal CD-type returns, not market returns. Spoiler alert, the annuity company, drastically lowers the initial payment to make up for that potential hypothetical, theoretical unicorns chasing the butterflies increase. Don't fall for that. That's the income rider pitch.
With income riders, in my opinion, you buy the income rider for the highest contractual guarantee, shopping all carriers for the highest contractual guarantee for your specific situation.
Remember, an income rider is an attached benefit to a policy, typically an Index Annuity that you will be pitched. That is a separate calculation for future income, monopoly money, and a phantom account that you can only use to calculate your first-lifetime income payment that will be in place for the rest of your life. They’re saying in the sales pitch that it's going to turn out this level, but the index option is going to increase it, and you're going to be rich, and it's going to be the best decision you've ever made. No, it's not.
Annuity companies don't give anything away. I'm not saying it's bad, but you have to understand that bit will 20 or 30 percent, depending on your age, decrease in the initial payment compared to the income rider that doesn't have this hypothetical unicorn chasing butterfly increase. With income riders, in my opinion, you buy the income rider for the highest contractual guarantee, shopping all carriers for the highest contractual guarantee for your specific situation. They're commodity products. There's not one that's better than the other.
Cost of Living Adjustment (COLA)
That's covering the cost of living adjustment riders with income riders. But the cost of living adjustment increases, COLA increases with Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts. Let's categorize those in annuitization products. Those are lifetime income products. You can attach a cost of living adjustment rider, and you can at the time of that application say, "You know what, Stan The Annuity Man or whoever is the annuity agent. I want my Immediate Annuity to increase by three percent." Fantastic. We can run it that way but remember that without the COLA, they're going to lower the payment to make up for that increase.
Cost of living adjustment riders is the only increase for inflation that you can attach at this point. Back in the day, they had Consumer Price Index for Urban Consumers, CPI-U, you could buy those for Immediate Annuities, and they had some calculation, and people thought they were being fancy for the increase. They don't offer those anymore at the time of this taping; check the date out. CPI-U increases; you can't get those with Immediate Annuities anymore. You can only get these COLAs, cost of living adjustment, and choose the percentage increase at the time of application.
Here's a simple one for you. The one percent increase will have a higher contractual guarantee than the three percent increase. The three percent increase will have a higher contractual guarantee than the five percent increase. See that? See how annuity companies are the big boomers. They're not giving anything away. By the way, you already own the best inflation annuity on the planet. What's it called, Stan The Annuity Man? I didn't know I own one? It's called Social Security. Don't be an annuity hypocrite and say you hate all annuities because you already own one.
But in terms of cost of living adjustment riders, I would encourage you to say, buy one with and buy one without if you're going to buy two if that's very important to you. But you already have the best inflation annuity on the planet. What I would do is maximize the payment and have it static. Now I know you geniuses out there, the cost of living and the buying capabilities of that income stream will lessen with the inflation, which could be bad. I understand it. Been there, done that, took the class with you. But there are no perfect solutions, just bad sales pitches.
The best way to truly address inflation, in my opinion, is when you need that income gap filled if, for example, you're getting $3,000 a month, all of a sudden, you and Martha need an additional $500 a month. We buy an immediate annuity at that time reverse engineer the quote to solve for that $500. That's the best way to do it, in my opinion. The other way is to have income starting at different time periods. You're 65; you have income starting at 70, 72, 75, 77, 80. You could have it staggered so that income is coming and starting at a different age level. Because the older you are, the higher the payment, just like Social Security.
There are no perfect answers for inflation. I know that you want one; I know that you were dying and hoping that this would be the place that you can finally find out that there was an annuity out there that could address inflation properly and explain the one you heard about at the bad chicken dinner seminar where you hoped the sales pitch was true. Sorry, brutally factual, telling the truth out there. It is what it is. But you can use annuities and some specific annuity types to address inflation.
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.