Inflation-Adjusted Annuities No Longer Available: Now What?
A reader writes in, asking:
“I’ve read on Bogleheads that the last insurance company stopped selling annuities with a CPI adjustment, meaning that there’s no nowhere to buy an annuity that has inflation protection. What are the implications for somebody nearing retirement?”
It’s true: sometime in the second half of 2019 (I’m unsure of the exact date), Principal stopped offering inflation-adjusted lifetime annuities, so they’re now unavailable commercially at all, as the other insurance companies that had been offering them stopped a few years ago.
So what impact does this have on retirement planning?
The first thing that comes to mind is that delaying Social Security is now the only option at all to buy an inflation-adjusted lifetime annuity. But I’m not sure how much this actually changes any decision-making, because it was already the case that delaying Social Security was the most desirable option available for somebody looking for safe lifetime income (with the possible exception of the lower earner in a married couple).
If I personally were in that critical stage of “just about to retire or recently retired” my overall plan for funding retirement spending would have looked something like this, back when inflation-adjusted annuities were available:
- Higher earning spouse delays Social Security to age 70,
- Lower earning spouse delays Social Security until the point at which our safe income satisfies what we consider to be our “necessary” spending,
- Buy an inflation-adjusted lifetime annuity if we needed more safe income than what we would get from Social Security if both of us were already planning to file at age 70,
- Use primarily stocks for any remaining assets, since such assets would be intended for discretionary spending (i.e., non-necessities).
But, step #3 is no longer an option.
The primary options to consider as alternatives would be Treasury Inflation Protected Securities (TIPS), a nominal annuity (i.e., one with no cost of living adjustment), or some combination of the two.
This is probably a good time to point out that annuities with a fixed annual cost of living adjustment (e.g., 2% per year) are still available. But as we’ve discussed previously, that doesn’t really protect you from inflation. (And in fact they perform worse in inflationary scenarios than annuities without any COLA at all.)
Creating a TIPS ladder would work well in that it creates a predictable, inflation-protected source of spending. But it has the downside of leaving you exposed to longevity risk (e.g., you build a 30-year TIPS ladder but end up living beyond 30 years).
A nominal annuity eliminates longevity risk, but it leaves you with inflation risk.
As for me personally, I have to admit that if I were recently retired, or just about to retire, I’d have a hard time devoting a particularly large chunk of my retirement savings to a nominal lifetime annuity. But it’s worth pointing out that some researchers have found that nominal annuities tended to be a better deal than inflation-adjusted ones anyway (see Wade Pfau’s An Efficient Frontier for Retirement Income, or David Blanchett’s article in Advisor Perspectives last year, for example).