Annuities and the Coming Inflationary Storm
I know that right now a lot of "talking heads" are discussing the current deflationary scenarios rippling through our economy. In that environment, any annuity that offers a fixed rate of return would be a wise investment.
Unfortunately, we can be assured that the current round of deflation cannot last that long, not when Ben Bernanke has doubled the balance sheet of the Federal Reserve in the last year alone. Inflation always follows money creation, usually with a 1-3 year lag.
So if we believe that the future holds inflation, then we should be very, very wary of any fixed rate annuity that would not be higher than the inflation that we expect down the road. Conservative estimates of coming inflation would be in the 4-6% range. Personally, if that is all that we have to deal with, then President Obama and Dr. Bernanke have succeeded in what they set out to do.
I however, do not think that the government will succeed, and we will be looking at a higher interest rate than 6%. Maybe 10%? Maybe 16% like in 1980. Maybe something higher?
In an inflationary environment, you do not want to be locked into any fixed rate annuity. You would want it to be variable, but not tied to the Federal Reserve rate or CPI, both of which the government controls and uses for political power, not for the "common good".
In conclusion, beware of the coming inflation!! Don't be caught in an 8% fixed rate annuity while we experience 12% inflation. No one wants a guaranteed loss of 4% a year before taxes!!
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