Last edited Sat Dec 17, 2022, 04:08 PM - Edit history (3)
of which there was a 14.4% decline in just the last 2 years. So while my annual payments stay the same in nominal dollars, let's say $20,000, the purchasing power of those payments has dwindled to $15,340 in just 6 years. Ouch.
And unlike stocks, purchasing power never recovers. The only way purchasing power increases is by deflation, and a prolonged period of deflation that recovers anything like 23.3% purchasing power would be a severe long great recession that would obviously be very problematical financially in other ways.
As you often say, not all annuities are the same!!!! Mine was a charitable gift annuity that was offered as a thank you for giving Population Connection my farm. I was fully aware when I got it that its purchasing power would dwindle, and that's just a life-in-the-big-city kind of thing. It's a simple fixed dollar income annuity. It's not tied to any index or anything like that.
While it was an unusual situation, there are annuities just like that on the commercial market (though higher yielding). One could pay more for 2%/year inflation protection (whoopee) or for some residual value for heirs, but that would cut the effective yield.
In fairness, bonds have the same problem with inflation. Although at least its not a permanent thing if one buys intermediate or short term ones -- if inflation and interest rates go up, one can also replace maturing bonds with higher yielding ones. But its a slow process and only helps somewhat. And for shorter duration bonds, one generally gets lousy yields.
And there's I-bonds and individual TIPS (not TIPS bond funds!!!!) that keep up with inflation and a little bit more (if held to maturity). As for bond funds, because of all kinds of dynamics, what one paid for such a fund and what one sold it for is usually not anything near inflation -- could be better (e.g. when general interest rates are falling), could be worse (when general interest rates are rising).
Stocks at least have a history of beating inflation over the long run.
What shocks me in this thread the most so far is that anybody would invest in anything based only on yield, without questioning why the yield was so great and steady. Without looking at the composition of the distributions -- how much is actual income, and how much is return of capital (draining the fund of its seed corn and more, an unsustainable process). And not looking at total return. I hope that person's broker didn't recommend that. I thought it was common investing knowledge to always question an unusually high yield and do one's due diligence, but apparently not.
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