An annuity is a contract between you (the purchaser or owner) and the issuer (usually an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays out the principal and earnings back to you or to a named beneficiary.
Two distinct phases to annuities
There are two distinct phases to the life of an annuity contract.
One phase is called the accumulation (or investment) phase. This phase is the time period when you invest money in the annuity. You can invest in one lump sum (called a single payment annuity), or you can invest a series of payments in an annuity. The payments may be of equal size over a number of years (e.g., $5,000 per year for 10 years), or they may consist of a series of variable payments.
The second phase to the life of an annuity contract is the distribution phase. There are two broad options for receiving distributions from an annuity contract. One option is to withdraw earnings (or earnings and principal) from an annuity contract. You can withdraw all of the money in the annuity (both the principal and the earnings) in one lump sum, or you can withdraw the money over a period of time through regular or irregular payments. With these withdrawal options, you continue to have control over the money that you have invested in an annuity. You can withdraw just earnings (interest) from the account, or you can withdraw both the principal and the earnings from the account. If you withdraw both the principal and the earnings from the annuity, there is obviously no guarantee that the funds in the annuity will last for your entire lifetime.
Guaranteed income (annuitization) option
A second broad withdrawal option for an annuity is the guaranteed income option (also called the annuitization option). If you select this option, you will receive a guaranteed income stream from the annuity. The annuity issuer promises to pay you an amount of money on a periodic basis (monthly, quarterly, yearly, etc.). You can elect to receive either a fixed amount for each payment period (called a fixed annuity payout) or a variable amount for each period (called a variable annuity payout). You can receive the income stream for your entire lifetime (no matter how long you live), or you can receive the income stream for a specific time period (10 years, for example). You can also elect to receive the annuity payments over your lifetime and the lifetime of another person (called a “joint and survivor annuity”). The amount you receive for each payment period will depend on how much money you have in the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin the annuitization phase. The length of the distribution period will also affect how much you receive. If you are 65 years old and elect to receive annuity distributions over your entire lifetime, the amount you will receive with each payment will be less than if you had elected to receive annuity distributions over 5 years.
Example(s): Over the course of 10 years, you have accumulated $300,000 in an annuity. When you reach 65 and begin your retirement, you annuitize the annuity (i.e., elect to begin receiving distributions from the annuity). You elect to receive the annuity payments over your entire lifetime–called a single life annuity. You also elect to receive a variable annuity payout whereby the annuity issuer will invest the amount of money in your annuity in a variety of investment portfolios. The amount you will then receive with each annuity payment will vary, depending in part on the performance of the mutual funds. In the alternative, you could have elected to receive payments for a specific term of years. You could have also elected to receive a fixed annuity payout whereby you would receive an equal amount with each payment. Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.
Cannot outlive payments to you if you elect to annuitize for your entire lifetime
One of the unique features to an annuity is that you cannot outlive the payments from the annuity issuer to you (assuming you elect to receive payments over your entire lifetime). If you elect to receive payments over your entire lifetime, the annuity issuer must make the payments to you no matter how long you live. Even if you begin receiving payments when you are 65 years old and then live to 100, the annuity issuer must make the payments to you for your entire lifetime. The downside to this ability to receive payments for your entire life is that if you die after receiving just one payment, no more payments will be made to your beneficiaries. You have essentially given up control and ownership of the principal and earnings in the annuity.
Immediate and deferred annuities
There are both immediate and deferred annuities. An immediate annuity is one in which the distribution period begins immediately (or within one year) after the annuity has been purchased. For example, you sell your business for $1 million (after tax) and then retire. You purchase an immediate annuity for $1 million and begin to receive payments from the annuity issuer immediately.
A second type of annuity is a deferred annuity. With a deferred annuity, there is a time delay between when you begin investing in the annuity and when the distribution period begins. For example, you may purchase an annuity with a single payment and then not begin receiving payments for 10 years. Alternatively, you may invest a series of payments in an annuity over a period of 5 years before the distribution period begins.
Earnings tax deferred
One of the attractive aspects to an annuity is that the earnings on an annuity (i.e., the interest earned on your money by the issuer) are tax deferred until you begin to receive payments back from the annuity issuer. In this respect, then, an annuity is similar to a qualified retirement plan. Over a long period of time, your investment in an annuity may grow substantially larger than if you had invested money in a comparable taxable investment.
(However, like a qualified retirement plan, there may be a 10 percent tax penalty if you begin withdrawals from an annuity before the age of 59½.)
Four parties to an annuity
There are four parties to an annuity: 1) the annuity issuer, 2) the owner, 3) the annuitant, 4) and the beneficiary.
- The annuity issuer is the company (e.g., an insurance company) that issues the annuity.
- The owner is the individual who buys the annuity from the annuity issuer and makes the contributions to the annuity.
- The annuitant is the individual whose life will be used as the measuring life for determining the distribution benefits that will be paid out. (The owner and the annuitant are usually the same person, but they do not have to be.)
- Finally, the beneficiary is the person who receives a death benefit from the annuity upon the death of the contract owner.
For more information: Contact: Paul A. Pouliot & Associates; Paul A. Pouliot, Senior Financial Advisor, 116 South River Rd, Coldstream Park, Bldg E, Bedford NH 03110. PH: (603) 296-0030 or Toll Free: (888) 810-8590. Email: paul.a.pouliot@ampf.com / www.ameripriseadvisors.com/ paul.a.pouliot
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By: Beth Paterson,Executive Vice President, Prestige Mortgage LLC/Reverse Mortgages SIDAC
Are you looking for some funds to supplement your retirement? Do you need to modify your home to meet your needs? Are you looking for a way to pay for the home health care you need? Do you have a mortgage and find making the payments is a struggle? Or maybe you want to continue making your trip south during the winter but funds are short to do so.
A reverse mortgage may be your answer. A reverse mortgage is a home equity loan with special terms for senior homeowners 62 and older. Similar to a conventional loan, you own the home and are responsible for taxes, insurance, and maintenance. The difference, and the benefit to seniors, is there is no income or credit score qualifications and no monthly payments required. It also offers more flexibility on how you can receive the funds including monthly payments, line of credit, lump sum or a combination of these versus a lump sum with a conventional mortgage. Additionally funds left in the line of credit grow so more funds become available over time. The loan becomes due and payable when the home is no longer the primary residence of the borrowers or on their 150th birthday. Another difference and benefit of the reverse mortgage is that the reverse mortgages are non-recourse loans. This means there is no personal liability if the loan balance is higher than what the home can be sold for and the borrower or their heirs are not maintaining ownership.
There are no limitations on how you spend the funds. Look at how the reverse mortgage benefited some seniors:
• Eliminate Mortgage Payments, Home Upgrades and Line of Credit: Dee and Peter did a reverse mortgage to eliminate their current mortgage payment, take a lump sum for some home upgrades, receive an extra $300 a month in monthly payments to supplement their Social Security, and still have funds in a line of credit for future use.
• Maintain Lifestyle: Helen and Harold did a Reverse Mortgage to afford to take their annual trip to Florida during the winter months. They are thankful they are able to maintain their lifestyle.
• Not Rely on Children: Nancy had accrued some debt including some credit cards and borrowing from her children. She did a Reverse Mortgage to pay off those debts and to have a line of credit available for future needs. She also enjoyed having some extra cash to purchase some things to fix up her home and to go to lunch with friends on occasion. Because her children had their own expenses and needs, they were relieved that their mother had done the Reverse Mortgage and could live more comfortably without relying on them.
• Protect Other Investments: To have extra spending money without having to cash out their CDs or other investments, Jerry and Carol decided to do a Reverse Mortgage.
As with any loan there are closing costs. The costs of the reverse mortgage are comparable to a conventional FHA loan. They include the origination fee, appraisal, title settlement and recording fees as well as the FHA Mortgage Insurance Premium. However, with the reverse mortgage HUD regulates the fees and requires that only the actual cost may be charged to the borrower, they do not allow mark ups such as processing fees. When comparing costs side by side to a conventional loan the difference is the up-front FHA Mortgage Insurance Premium. The benefits of FHA insuring the loan include guaranteed funds, a lower interest and the loan being non-recourse as well as regulating the fees.
When considering whether to do a conventional mortgage or a reverse mortgage you must consider if you can even qualify for a conventional mortgage; then if you can make the payments over time. For example, what happens if “life happens,” could you continue making those payments or would you be facing foreclosure?
When you decide to do a reverse mortgage make sure you work with an originator or loan officer who is FHA licensed, specializes in Reverse Mortgages, has years of experience and knowledge in reverse mortgages in your state, meets the state licensing requirements (for example in MN mortgage brokers need to be individually licensed – even if they are calling you from another state), and are willing to meet with you to review the details, before the application, during the application and at closing. I would caution about working with a lender from another state who is mailing all the documentation, including the application and not “meeting” with you to explain and review what you are signing. Ask for references and find out if they will be there for you even after the loan has closed. If you feel pressured, call another lender. You can find a list of questions to ask an originator at www.rmsidac.com, “Why Choose SIDAC,” “What To Consider When Talking To Lenders.”
To ensure that borrowers understand reverse mortgages HUD requires anyone doing a reverse mortgage to complete counseling through a third-party. They will review the program and discuss other options that may be available.
Will the reverse mortgage be the answer to your financial retirement needs? Explore the option, get the facts, know what to look for in a lender, you might find it will benefit you as it has benefited hundreds of thousands of other seniors.
SOURCE: Beth Paterson, Executive Vice President, Prestige Mortgage LLC/Reverse Mortgages SIDAC
www.RMSIDAC.com;
http://BethsReverseMortgageBlog. wordpress.com
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By Paul A. Pouliot
Americans now know that income tax rates are not going up (at the federal level) this year. In fact, most people will temporarily pay less federal tax than was the case previously. The tax savings may create an opportunity for you to consider putting more money to work toward your key financial goals.
Here is a rundown of what’s been put in place effective in 2011 (or in some cases, in 2010):
Extension of 2010 tax rates
Federal income tax rates established in 2001 and scheduled to expire at the end of last year are now in place through 2012. Tax brackets start at 10 percent and peak at 35 percent.
Temporary Employee Payroll Tax Holiday
For 2011 only, the 6.2 percent Social Security tax deducted from your paycheck (up to the first $106,800 of Social Security wages in 2011) will be reduced to 4.2 percent. That means an extra $200 for every $10,000 of Social Security wages you earn (up to the Social Security wage limit). Note that the reduction does not apply to the employer’s contribution to Social Security and the payroll tax related to Medicare for both employers and employees remains unchanged. A similar reduction also applies for self-employment tax.
Extension of capital gain and dividend tax rates
Like income tax rates, existing rates on long-term capital gains and qualifying dividends were scheduled to increase at the end of 2010. However, the rates that existed in 2010 have been extended through 2012. The highest applicable tax rate on most long-term capital gains and qualifying dividends is 15 percent and for lower-income taxpayers can be as low as 0 percent.
Renewal of Education Tax Credit and Other Education-Related Provisions
The enhancements made to the Hope Scholarship Credit (American Opportunity Tax Credit), which provided for a $2,500 maximum tax credit per student for the cost of tuition and related expenses paid during a taxable year in 2009 and 2010, is extended to 2011 and 2012. Qualification for the credit is subject to income limits. The credit is phased out for single taxpayers with income over $80,000 and married couples filing a joint return with income over $160,000.
Also extended for 2011 and 2012 is the ability of certain individuals to deduct up to $2,500 in interest on qualified higher education loans from their income taxes. The deduction phases out for individuals earning more than $60,000 and married couples filing a joint return with income above $120,000.
Families can continue to invest up to $2,000 per year in Coverdell Education Savings Accounts in 2011 and 2012. Dollars can grow on a tax-advantaged basis and be used to pay elementary, secondary and higher education expenses.
Estate Tax Is Back But Affects Fewer People
The estate tax has been in flux for several years. In 2009, a per-person exclusion of $3.5 million was in place. Taxable estates valued beyond that amount were subject to a tax of 45 percent. In 2010, the estate tax was scheduled to be repealed, but only for that year. Under the new law, the estate tax is retroactively reinstated for 2010 (but with an elect-out provision) with an exclusion amount set at $5 million per person, so potentially $10 million per couple – with a tax rate of 35 percent applying to estates larger than that. The higher exclusion amount and lower rate apply for 2011 and 2012.
What to Consider Now That Rates Are Set
Strategies that may be suitable will depend on your circumstances, but here are some specific ideas to consider in light of the recent tax legislation:
• Make sure that the amount being withheld from your paycheck is appropriate. Now that you know income tax rates aren’t going up this year or next, you are better off avoiding having too much withheld and ending up with a large tax refund every year. This is money that could be put to better use each month, specifically toward your key financial goals.
• Consider taking the two percent savings from the temporary payroll tax holiday and putting it to work toward your retirement by increasing the amount directed to your workplace savings plan, or making a regular contribution to an IRA.
• Determine if you should adjust your investment strategies to take advantage of the ongoing favorable rates for long-term capital gains and qualifying dividends.
• Review your estate plan to determine if any changes are needed in light of the new estate tax laws. Make sure any trusts and wills are up to date and consistent with the law, especially since the most recent change is only effective through 2012.
• Stay prepared for future changes. By the end of 2012 at the latest, Congress is likely to have to address many of these same tax issues again. A regular review of your financial and tax situation should be part of your routine.
• Consult with your financial and tax advisors for more information before making any critical decisions that could have a tax impact.
Paul A. Pouliot CFP®, CHFC®, CASL®
Financial Advisor
An Ameriprise Platinum Financial ServicesSM practice
Ameriprise Financial Services, Inc.
116 South River Road | Bedford, NH 03110
Office: 603.296.0030 | Fax: 603.296.0028
paul.a.pouliot@ampf.com
ameripriseadvisors.com/paul.a.pouliot
Disclaimer: This communication is published in the United States for residents of AZ, CT, FL, GA, ID, KY, MA, ME, NH, RI, TN, VT and WA only and this advisor is licensed only in the states of AZ, CT, FL, GA, ID, KY, MA, ME, NH, RI, TN, VT and WA
Ameriprise Financial does not provide tax or legal advice. Consult your tax advisor or attorney.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.
© 2011 Ameriprise Financial, Inc. All rights reserved.
File #111537
(02/2011)
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By Paul A. Pouliot
Life insurance companies first developed annuities to provide income to individuals during their retirement years.
This function is in contrast to the benefits that a life insurance policy provides to your beneficiaries after your death. Although annuities were first developed to fund an annuitant’s retirement years, there is no requirement that an annuity be used only for retirement purposes. In fact, annuities may be and are used to fund other financial goals, such as paying for a child’s education or starting a business.
Example(s): Liz is a highly successful entrepreneur. Her business has grown far beyond what she has ever imagined, but her long hours have taken a toll on both her and her family. Liz plans to sell the company in the near future and pursue her lifelong interest in landscape painting full-time. Even though she expects a modest income from the sale of her paintings, Liz will use the sale proceeds from her company to purchase an annuity that will provide her with regular, guaranteed income for the rest of her lifetime. Sam’s company does not offer a retirement plan, and he has already contributed the maximum amount to his individual retirement account (IRA). Knowing that he can and needs to save more aggressively for retirement, Sam purchases an annuity to which he will contribute regularly until he retires. He will then receive a guaranteed income stream from the annuity in addition to receiving Social Security and income from his IRA.
Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.
How do annuities differ from other retirement plans?
Annuities differ from other types of retirement plans in several important ways. Contributions are not tax deductible. Unlike contributions to a qualified retirement plan, money you invest in an annuity is not tax deductible. Any money that you use to purchase an annuity will be after-tax income. (However, like a qualified retirement plan, interest and capital gains earned by an annuity will accrue tax deferred until you begin withdrawing the money from the annuity.)
Contributions are unlimited
All qualified retirement plans have limitations on how much you can contribute each year. With many plans, the amount that can be contributed is quite low. However, there is no limitation on how much you can invest in an annuity. If you win a lump sum of $1 million in the lottery, you can invest the full amount (after paying the applicable income taxes, of course) in an annuity.
May receive income for life from annuity
One of the unique features to an annuity is that you cannot outlive the income payments (assuming you elect to receive the payments over your entire lifetime). With some types of qualified retirement plans, you will receive payments from the plan only until all the money in the retirement account is depleted. There is the real possibility that you will outlive the money available in the account. Some qualified retirement plans do offer their beneficiaries the option to convert monies in the account into an annuity upon retirement.
Investment options
The money that you use to purchase an annuity may be placed in the annuity issuer’s general funds pool. The money is then invested and managed by the issuer’s own money managers. Some types of annuities (called variable annuities) allow you to place your annuity funds in specific investment pools, typically called subaccounts. The funds are managed by an investment advisor. You may then be able to move your annuity investments between stocks, bonds, money markets, or other types of investments. Caution: Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk including the possibility of loss of principal.
Variable annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.
What are the advantages to annuities? Earnings accrue tax deferred
As noted, one of the main advantages to an annuity is that the interest generated by an annuity accrue tax deferred. Over a long period of time, this deferral of taxes on earnings is an advantage for an annuity over a comparable taxable investment.
Guaranteed payments for life
Another advantage to an annuity is that you can receive payments from the annuity for your entire lifetime. As long as you elect to receive payments over your entire lifetime when the payout period begins, you will receive the payments for as long as you are alive. Even if you live to the age of 100, the annuity issuer must make the payments to you.
No contribution limits
Unlike qualified retirement plans, there is no limit on how much you can invest in an annuity. Many different types of annuities available In recent years, there has been a huge increase in the number and variety of annuities available in the marketplace. There are numerous fixed annuities, variable annuities, and equity-indexed annuities that an individual can choose.
Can delay payout until later age
With most qualified retirement plans, you must begin taking money out of the plan by a certain age (usually 70½). With an annuity, there is no age limit at which you must begin receiving payments from the annuity. If you do not need the money from the annuity, you can continue to have the earnings accrue tax deferred.
Proceeds avoid probate
If you die before the distribution period begins, then the money you have invested in the annuity (plus any accrued interest or earnings) does not have to be included in your probate estate if you have named a beneficiary on the annuity. The money in your annuity will pass directly to that named beneficiary. Because of the potential delays and costs in having your assets pass through probate, most estate planners recommend that you try to avoid having assets pass through probate.
For more information: Contact: Paul A. Pouliot & Associates; Paul A. Pouliot, Senior Financial Advisor, 116 South River Rd, Coldstream Park, Bldg E, Bedford NH 03110. PH: (603) 296-0030 or Toll Free: (888) 810-8590. Email: paul.a.pouliot@ampf.com / www.ameripriseadvisors.com/ paul.a.pouliot
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Avoid unpleasant surprises.
Keeping an eye out for these tell-tale signs can tip you off that something is awry.
Here is a checklist of eight red flags to look for.
Paying attention to clues that something’s wrong with an elderly friend or relative can pay off. The trick is to recognize the clues when they appear and act fast.
Which signals should you be on the alert for? While these changes don’t always mean something sinister is happening, they can be an indication.
Look for:
· An unexplained change for the worse in the person’s standard of living
· A marked difference in personality or habits that coincide with the arrival of a new friend, romantic interest, caretaker or even a relative
· Changes in long-standing financial arrangements, such as a new will or cashed CDs
· Forged documents
· Signs the person isn’t well-cared for, including changes in health, personal hygiene, eating habits or surroundings
· Unexplained charges on credit cards or withdrawals from bank accounts
· The disappearance of jewelry or other valuable items
· Substandard or unneeded services, such as unnecessary home repairs
Scams targeting seniors can range from the simply ridiculous to the sublimely complicated. Experts say the best way to keep thieves and con men out of grandma’s pocketbook is to know what’s out there.
By Carole Moore,
SOURCE: AOL Money and Finance
If you suspect elder abuse, please contact:
Protective Services Program
Executive Office of Elder Affairs
One Ashburton Place, Room 517
Boston, MA 02108
Elder Abuse Hotline V/TTY Toll Free: 1-800-922-2275 (24/7 within Mass. only)
Fax: (617) 727-9368
E-mail: information.resources@state.ma.us
Protective Services Program investigates and, when appropriate, intervenes in cases where there is evidence that an elder has been neglected, abused or financially exploited by someone in a domestic setting. The protective services system is anchored by a 24 hour, seven day a week emergency hotline. It is empowered by Massachusetts General Law Chapter 19A to take steps that ensure that elder victims of physical and emotional abuse, neglect, and financial exploitation receive protective and supportive services. Elders must consent to services, but in situations where an elder lacks the capacity to provide consent, court ordered services are provided.
Check out Resource Page for more links of interest.
Do men and women see things differently? At least on the topic of retirement, the answer may be yes. A recent study commissioned by Ameriprise Financial reveals that gender may play a significant role in how we feel about and prepare for this major life event.
According to findings from the New Retirement Mindscape IISM study, women tend to have a more positive outlook towards retirement, while men are more likely to feel financially ready for it. The study also found that the recession has impacted men and women differently, a fact that may account for dissimilarities in the way they plan and prepare for retirement. For those in a couple, these differences could cause some major bumps on the road to a shared retirement. Financial pitfalls and stress on your relationship are just two of the potential fallouts you and your spouse or partner could encounter if you fail to communicate effectively about your plans and goals for retirement.
The Findings: Understanding the Gender Split
In 2005, Ameriprise Financial commissioned the New Retirement Mindscape® study, which examined how Americans ages 40-75 view retirement. Five years later, prompted by the seismic shift in the economy, Ameriprise revisited this research to discover how the retirement landscape has changed for U.S. consumers. Findings from the New Retirement Mindscape II study demonstrate that men and women continue to approach retirement differently, and that the recession may have actually made the contrast starker.
If you tend to feel more excited about retirement than your spouse or partner (or vice versa) you’re not alone. In 2010, pre-retired women are much more likely than men to feel “enthusiastic” about retirement (74% vs. 65%). They’re also more likely to feel “excited with anticipation” about the day they retire than men (53% vs. 38%). Meanwhile, among retired men, fewer express that they “enjoy retirement a great deal” in 2010 (56%) than they did in 2005 (67%), while the percentage basically has held steady for retired women (57% in 2005 vs. 56% in 2010).
Why the gender enthusiasm gap? If you’ve read the newspaper recently, you might guess one possible reason: men have been hit harder by the recession. According to the Bureau of Labor Statistics, men account for nearly two-thirds of the jobs lost between late 2007 and December 2009. With such lopsided economic fallout, it’s perhaps no wonder that men report feeling less excited about retirement than women.
There’s the old joke about men being reluctant to stop and ask for directions. In fact, when it comes to financial planning, this may hold true. Despite having been hit harder by the recession, men in general are less inclined to seek guidance from a financial advisor. Both genders are more likely to work with a financial advisor in 2010 than they were in 2005; however, women do so at a higher rate (46% vs. 38%).
What’s more, it appears that men and women may be planning for a different type of retirement. More pre-retired men expect to work—either part-time or full-time—in retirement than pre-retired women (38% vs. 27%). Meanwhile, pre-retired women appear to place importance on being able to volunteer (31% vs. 22%) and spend time with family (77% vs. 68%) during retirement.
Time to Talk Retirement
The study’s findings paint a complicated picture for anyone who’s planning to retire with a spouse or partner. What if you’re planning to retire next year and your mate wants to keep working for another decade? What if you envision a retirement filled with travel and your spouse or partner wants to stay close to home? What happens if you disagree about whether or not you can even afford to retire?
To avoid any unfortunate surprises as you approach or enter into retirement, open up the lines of communication with your spouse or partner about their hopes, fears and level of preparedness for retirement as early as possible. Discussing how you want to spend retirement is not only important from an emotional aspect, but also a financial one. Establishing your goals for the future will help you determine how much money you need to save in order to fund them.
A financial advisor can assist you with writing a financial plan that weaves together your financial objectives and your partner’s. In addition to providing a roadmap to your financial future, it can be an opportunity to learn how he or she envisions retirement. The process may be eye-opening.
Paul A. Pouliot CFP®, CHFC®, CASL®, Senior Financial Advisor, An Ameriprise Platinum Financial ServicesSM practice, Ameriprise Financial Services, Inc., 116 South River Road | Bedford, NH 03110 / Office: 603.296.0030 | Fax: 603.296.0028 – paul.a.pouliot@ampf.com / www.ameripriseadvisors.com/ paul.a.pouliot
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By Paul A. Pouliot
You can forgive Americans for being caught off guard by talk of the potential for more dramatic price increases in the coming years. For the past two decades, inflation has not been a significant concern. In only six years out of the last 20 has the inflation rate (as measured by the Consumer Price Index) turned in more than even a modest annual increase of 3 percent. By contrast, in the prior 20-year period, prices rose by more than 3 percent annually in all but one year. Annual price increases topped 12 percent in three different years during the late 1970s and early 1980s.[1]
Are we headed for another era of high inflation? There are concerns on some fronts, particularly given rising prices for commodities such as food, metals and energy. The World Bank reports that food costs globally rose 30 percent in the 12 months ending in January 2011.[2] While some price increases are being felt in the U.S., consumers here so far have been spared any serious impact. According to the Bureau of Labor Statistics, the price of a basket of common food items in the U.S. rose just 1.5 percent in 2010[3]. However, the average price of a gallon of regular gasoline, according to the U.S. Energy Information Agency, jumped 18% in 2010.[4]
The sudden focus on the risk of inflation is a surprising shift from just a few months ago, when many economists were raising concerns about deflation, the threat of prices for goods and services declining. Deflation is a sign of economic weakness. Modest inflation, on the other hand, tends to reflect a stable and growing economy. However, rapid inflation can create a real strain for consumers, businesses and the economy as whole.
Making sense of the numbers
The government reports inflation numbers every month using the Consumer Price Index (CPI). This is only meant to portray an average rate of cost increases across a broad spectrum of the economy. You may think that rising prices for food, gasoline, health care and college tuition are reducing your purchasing power more than the CPI indicates. But the CPI also accounts for other costs, such as housing, labor and services, which in some cases have been flat or declining in price in recent years.
Higher inflation in certain items, however, can have an impact across other parts of the economy. If higher prices for commodities like food and energy products persist, the effect is likely to spread to other areas of the economy where companies will be forced to increase prices as well. This can lead to more substantial hikes in the cost-of-living that are felt by nearly everybody.
Protecting your money if severe inflation returns
Faster increases in living costs can clearly create challenges for you. Here are some steps you can take now to prepare for the potential impact of higher inflation:
• Closely review your spending – now is a great time to think about your living expenses. The more you spend, the more costly life becomes if inflation develops into a serious issue again in the future. Try to find ways to limit driving to reduce gas costs. Adjust your food shopping habits to make your budget more efficient. Steps you take today will ease the burden of potential future inflation concerns.
• Consider making “big ticket” purchases sooner – buying a home or car or completing a major home project may be less expensive today than it will be in several years if inflation picks up. Now may be the time to take advantage of the purchasing power that exists today – if it fits your budget.
• Lock in low rates for borrowing – if you have borrowed money using an adjustable interest rate (many homeowners do this with their mortgage), you might want to consider locking in a low fixed rate for an extended term. If inflation does rise, it is likely that interest rates will follow a similar course. Better to lock in the lowest rates you can if it is appropriate for you to do so now.
• Don’t lock into low rates on a long-term savings vehicle – there is little advantage to putting a large amount of money into a bond or certificate of deposit for an extended period of time if it pays a very low interest rate. On an after-inflation basis, the return you earn today is nominal. If inflation becomes more significant down the road, your return could actually be negative after rising living costs are taken into account.
• Invest in assets that can appreciate in value – stocks of companies positioned to grow during inflationary periods, commodities such as precious metals, agricultural or energy investments and real estate historically tend to perform reasonably well if living costs rise more dramatically. Be certain that any investment decisions you make are consistent with your long-term objectives and your risk tolerance.
[1] http://data.bls.gov/pdq/SurveyOutputServlet
[2] http://www.worldbank.org/foodcrisis/food_price_watch_report_feb2011.html
[3] http://www.bls.gov/news.release/cpi.nr0.htm
[4] http://www.eia.gov/dnav/pet/pet_pri_gnd_a_epmr_pte_dpgal_a.htm
Paul A. Pouliot CFP®, CHFC®, CASL®
Financial Advisor
An Ameriprise Platinum Financial ServicesSM practice
Ameriprise Financial Services, Inc.
116 South River Road | Bedford, NH 03110
Office: 603.296.0030 | Fax: 603.296.0028
paul.a.pouliot@ampf.com
http://ameripriseadvisors.com/paul.a.pouliot
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Ameriprise Financial does not provide tax or legal advice. Consult your tax advisor or attorney.
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