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Columns: Boomer Bucks
Barbara Mlotek Whelehan   Expert: Barbara Mlotek Whelehan
Boomer Bucks
It seems we're always considering the wrong number when gauging the inflation rate.
Boomer Bucks

Inflation under suspicion
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These aren't cheap. With immediate annuities, you basically exchange a lump sum of money for a guaranteed stream of payments that lasts as long as you do. And they come with bells and whistles. For example, you can buy a lifetime annuity to last as long as you live or for as long as both you and your spouse live, though the payout will be smaller in the latter case. If you want a guaranteed income for life, but also with a guaranteed term, you can buy them with certain terms of five, 10 or 20 years so that in case you die prematurely, a beneficiary can collect a check for the remainder of the specified term. Again, with a certain term, the payout will be less.

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Some annuities come with COLA increases (you may be able to choose from 1 percent to 5 percent) and some can be pegged to the CPI.

Here's a quote I got from a reputable financial services firm for a single-life annuity for a 62-year-old woman. For a lump sum of, $100,000, "Sally" can get initial monthly payouts of the following amounts, depending on the product chosen:

Monthly annuity payouts in exchange for $100,000
  Regular annuity Annuity linked to CPI Annuity with 3% COLA
Single lifetime
10-year term certain
20-year term certain

For the regular annuity, the payouts are much higher going out the gate, but they never change. Notice the single lifetime annuity offers a monthly payout of $200 more than the initial monthly payout linked to the CPI. Does it make sense to take the inflation option?

It would take nearly 13 years before that $428 payment would reach the level of $628, assuming an annualized CPI rate of 3 percent. Meanwhile, Sally would have missed out on those higher payments for that time period. The break-even point is 17 to 20 years into receiving the annuity payments, after which the person who opted for the CPI-linked adjustments would "win the bet" against the insurance company and get higher payouts on the back end.

So you pay a price for the certainty of a payment that increases with inflation. And you pay a price if you live with the uncertainty of inflation. Insurance products are among the few things that offer guarantees (assuming, of course, the firms don't go out of business) -- and that can give you peace of mind. But this peace of mind doesn't come cheap.

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