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Inflation Adjusted Immediate Annuity!

Regular readers of mine know that I am anti-Variable Annuity, one of my first articles on my main site JoeTaxpayer.com was titled “Variable Annuities are sold, not bought”. More recently, I quoted Suze Orman, who “hate[s] them with a passion”. That blog post received much response from readers challenging me to be more open minded. So I invited those readers to offer me a VA that they felt was worth a fresh look. In my August feature article titled “Another Look at Variable Annuities”, I analyzed the Fidelity Growth & Guaranteed Income Annuity. It’s a piece worth reading and as always, I invite any comment. In it, I conclude that the product doesn’t achieve what the typical buyer is seeking, inflation protected growth. I was challenged to suggest an alternate solution and in this month’s feature article, “Creating an Inflation-Adjusted Immediate Annuity”, I offer a strategy to create an inflation-adjusted stream of income from the purchase of a series of standard (non-adjusted) annuities. This is a strategy I am proud to present as I’ve not seen such a strategy presented elsewhere, and it offers both a high starting withdrawal rate (5%) along with conservative assumptions (4% inflation factor, yet just 3% return on savings). Please read it and share your thoughts.


  • Dave September 2, 2008, 12:24 pm


    Vanguard (in partnership with AIG) offers a Fixed Single Life Annuity with inflation adjustments. $200K would buy a monthly payment of $1130 for a 65 yr old male, with yearly inflation adjustments (based on CPI-U). This works out to a 6.8% starting withdrawal rate.

    The other thing to note is the tax advantages of immediate annuities. Like VAs, immediate annuity payments are only partially taxed (if purchased using after-tax funds). Some of the payment is treated as a return of principle. For the example above, $832 is treated as return of principle, so only $298 a month is taxable income. Contrast this with a ladder of CDs, where 100% of the interest received is taxable.


  • JOE September 2, 2008, 2:52 pm

    A link to the prospectus would be appreciated. Googling for this comes up dry.
    Thank you for visiting.

  • Dave September 3, 2008, 8:54 am
  • JOE September 3, 2008, 4:36 pm

    There it is. 6.8% for a 65 year old. Pretty remarkable. I’ll read a bit more on their site and add it to my immediate annuity article. Given the focus on the 4% initial withdrawal rate, this annuity can be used so a 65 year old can buy a $40K/yr initial stream with only $588K instead of $1M. Not bad at all. Thanks for the pointer.

  • Dave September 10, 2008, 12:57 pm

    Inflation-adjusted income annuities are also available from Principal through the Elm Annuity brand (http://www.elmannuity.com/income_annuity/decision_guide.html). For $200K a 65 year old male can get $1067 a month for life, inflation adjusted. It appears to be slightly less than the Vanguard/AIG product. There is some benefit to diversification (in case the underlying insurance company were to default) so it might be worthwhile to put $100K into each.

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