There's a reason why the multi-billion dollar financial planning industry is booming: The approximately 76 million baby boomers approaching retirement are increasingly required to not only self-fund, but also self-administer their own retirement plans. A task as daunting as this -- with the very real possibility of outliving one's assets if not done correctly -- can make anyone feel like a deer caught in the headlights. In fact, according to a 2006 LIMRA report, few retirees (only 29 percent) have created plans to convert assets into retirement income.
However, boomers can't afford to be caught unprepared. Advances in medical technology along with increased awareness and education about healthy living are extending life spans, and boomers should plan on living at least between 20 to 30 years in retirement. But this progress comes with a price: the possibility of outliving your assets.
One step to ensuring this won't happen is investing in immediate fixed income annuities, which offer a steady stream of income that's guaranteed for life. An income annuity may also be an ideal tool for an investment portfolio because it helps cover recurring expenses such as food, utilities, housing, and long term care.
The problem: Inflation
One of the most frightening aspects of inflation is that it is extremely unpredictable. Many boomers can remember feeling the effects of soaring inflation rates between 1973 and 1982, when prices more than doubled and the inflation rate peaked at 13.58 percent in 1980. Although the Consumer Price Index (CPI) was only up 2.5 percent in 2006, even low inflation rates can have a sizable impact year after year. For example, a 3 percent annual inflation rate will reduce the buying power of a sum of money to half in approximately 24 years; a 5 percent rate will accomplish this in less than 15 years. Therefore, retirees need a guaranteed source of income that can keep up with inflation in order to maintain their desired standard of living.
The solution
The insurance industry has recently created an answer to these concerns -- fixed income annuities that now offer built-in inflation protection. Payments are linked to the CPI, which tracks the prices of goods and services and provides an indication of inflation.
With a CPI-option annuity, retirees' accounts are set up to automatically update payment amounts at the beginning of each year. The change in payments is based on the CPI-U index that the U.S. Bureau of Labor Statistics determines each quarter. The inflation adjustment rates don't have a cap, so even if the cost-of-living index goes up 20 percent, your payments will go up 20 percent, as well. Likewise, if the CPI goes down, your payment amount will go down, but it will never be lower than the original payment amount selected. However, because insurance companies provide a guaranteed minimum, when the CPI goes back up your payment will stay at the original level until CPI growth exceeds any negative adjustment.
In this do-it-yourself era of self-funded retirements, financial advisors are in demand to help boomers plan for the realities of retirement planning. Your clients' best interests may be served by recommending a fixed income annuity. They offer a source of steady, guaranteed income protection and can also provide income for a beneficiary in the event of an untimely death. It's a simplified approach to managing financial responsibilities in retirement -- and now, with the creation of new and innovative options that allow for inflation adjustments, there's an even greater ability to address the challenge of outliving your assets while maintaining your standard of living.
Michael Harrison is vice president of annuity marketing for AIG American General. He can be reached at 713-831-2794 or michael.harrison@aigag.com.
