A Social Security cost-of-living adjustment could have a small but positive impact on retirement planning.
By Cyril Tuohy
Penn Mutual has launched a new inflation protector withdrawal benefit for its Smart Foundation line of variable annuities (VAs), as VA sales slow at the expense of fixed annuities and their fixed index cousins.
The rider, which is designed to give retirees extra flexibility, is tied to the Consumer Price Index for all Urban Consumers (CPI-U), the company said.
New VA sales were $141.2 billion at the end of 2013, down 1.5 percent from 2012, according to Morningstar data.
Separate statistics issued by LIMRA peg total VA sales at $145.3 billion in 2013, down 1 percent from 2012, while total fixed annuity sales hit $230.1 billion last year, up 5 percent from 2012.
Andrew Martin, assistant vice president of product management for Penn Mutual, said the inflation rider is available to the company’s three Smart Foundation VA products.
“As we continue to operate in a market environment that changes constantly, we always want to offer competitive products that meet the change needs of clients,” Martin said.
Interest rates, low by historical standards, have gone up over the past 12 months. In April, the Federal Reserve said it would continue to scale back on its bond-buying program, a move some analysts expect will lead to higher interest rates.
Higher interest rates make borrowing more costly. Higher costs are a sign of inflation, which erodes buying power especially for people on fixed incomes like retirees.
Penn Mutual’s Smart Foundation VAs come in three varieties: Smart Foundation VA, Smart Foundation Flex VA and Smart Foundation Plus VA. The inflation rider can be added to any of these, the company said.
Inflation protection riders have their critics. Monthly payments from an annuity with inflation protection start “far below those of the regular variety,” writes Lynn O’Shaughnessy, author of The Retirement Bible and The Investing Bible.
Using the example of an annuity with 3 percent inflation protection, she writes that $100,000 invested in a regular immediate annuity would yield $687 a month in the first year compared with $518 a month in the first year with an inflation-protected annuity.
“With the pricing gap, it would take more than two decades before the inflation annuity generated more income,” she writes.
Penn Mutual said the inflation protection rider will guarantee retirement income to grow by at least the rate of inflation but not more than 6 percent.
The protection rider is the fourth optional benefit offered to the Smart Foundation suite of VAs.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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