Submitted by Anonymous on
There seems to be quite a bit of concern about inflation, and lots of discussion about how inflation impacts annuities and other financial services products.
I do not see as much discussion of deflation.
I believe that there is a real possibility of continued and prolonged deflation.
How are annuities impacted by deflation?
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tom replied on Permalink
Annuities and Deflation
The answer completely depends on whether you: a) have already purchased an annuity, b) the type of annuity if you have already purchased the annuity.
The rates on fixed annuities are going to be highly correlated or related to prevailing interest rates.
Deflation is most definitely going to result in very low interest rates (just look at Japan over the past 20 years). While somewhat debatable, probably not the best idea to purchase and lock-in a fixed annuity (particularly one that does not adjust annually for inflation) when interest rates are very low.
Deflation can be great if you have already purchased a fixed annuity (presumably when interest rates were somewhat higher). The fixed payments you receive would be higher in real terms.
The answer is more complex with variable annuities. It depends in part on how the equity market performs during a deflationary period (likely not great--again, look at Japan over the past 20 years). Also depends how optional product features such as guaranteed living benefits might be affected by changing or prevailing interest rates.
A very good question but obviously pretty involved.
CCR replied on Permalink
Annuities and Deflation
Why would annuity payments be higher in "real terms" with deflation?
tom replied on Permalink
Annuities and Deflation
Deflation is basically the opposite of inflation.
With inflation, the value of your purchasing power is decreasing over time. In other words, the value of $5 just isn't what it used to be.
With deflation, the value of $5 is more than it used to be--one is able to purchase more goods and services in the future with $5.
Since the annuity payments are fixed, your receipts and the purchasing power of those receipts are fixed. With deflation, you are able to purchase more with your fixed annuity receipt.
Make some sense?
tom replied on Permalink
Deflation - Income is King
Wall Street Journal personal finance columnist Brett Arends recently wrote a great piece on deflation.
The gist is:
- Income is king
- Cash and gold are attractive
- Equities are debatable at best
- Debt is toxic
Worth taking a look.