I was only a kid when a 16 ounce pound of coffee suddenly became 15 ounces, then 14, then 13, but other groceries stayed the same size for quite a while. It wasn’t until the mid ‘90s that some ice cream makers very quietly reduced the size of their half gallon to 1.75 quarts, since reduced to 1.5 quarts. After the millennium recession we witnessed several makers of bagged foods (cereals, chips, pretzels and such) reduce the quantity of the contents without reducing the size of the bag or the cost. The biggest kick in the shorts was what happened to toilet paper. It was bad enough that the paper on a roll shrunk from 468.7 square feet to 352 square feet – a 25% reduction in product size with no reduction in product price – but the TP makers tried to tell us this was better because they were now offering “double rolls” which is a meaningless marketing claim (I filed a complaint with the Federal Trade Commission about this false advertising, unfortunately the response back was “seriously?”, so I don’t think the Feds will be intervening in the TP scandal anytime soon).
However, the Feds did intervene in what I was earning on my savings. Back in 2007 the interest paid on my bank savings averaged 4.1%. As the Federal Reserve Board intervened the average CD rate rather quickly dropped to 2% by the end of 2008, it fell to 1% by the middle of 2009 and today the average one-year CD rate is 0.3%. CD interest income has shrunk by over 90% in 5 years.
A fixed annuity can guarantee your income will increase in future years even if rates do not
Every savings vehicle has been affected by yield shrinkage, but some offer more protection than others. Although current interest rates on fixed annuities have fallen just like other vehicles, fixed annuities guarantee that at least a minimum interest rate will always be earned, so money set aside to grow will continue to grow.
If the goal is income, fixed annuities offer a couple of ways to receive an income that will never go down and can even go up. One of these is through an income annuity that provides a set income for a specific number of years – or even for life. Another option that is rapidly growing in use is a lifetime withdrawal benefit that guarantees a minimum annual income and access to the cash value of the annuity. You can even find annuities where the income is guaranteed to increase each year even if interest rates do not.
I don’t think the era of shrinkage is over. When I went to the paint store last month the sign on top said “paint $15/gallon” but the paint can said it contained three and three quarter quarts. I wouldn’t be surprised if the way they eventually deal with the high price of gas is to say a gallon contain 3 quarts – and then brag about how the price is finally under $3 a “gallon”. However, in this steadily shrinking world there is one thing that won’t get smaller and that is the guarantee on your fixed annuity.
This article was written by:
Dr. Jack Marrion
Dr. Marrion is the founder of SafeMoneyPlaces.com. His research on senior decision making and the financial world have been featured in hundreds of publications.
Search our site:
Speak with an Agent: