BMO has a new Lifetime Cash Flow Product that seems suited especially for investors who are looking for safety and don’t understand inflation.
Jon Chevreau gave a clear overview of this new product and you can find all the details at the bottom of BMO’s managed programs page. A quick summary: make a lump sum contribution at age 55 and collect 6% per year for the rest of your life starting at age 65. When you die, if there is anything left after these payments and the yearly 2.75% MER, it goes to your estate.
Suppose that Jim is 55 years old and has a lump sum of $200,000. He can get $1000 per month starting at age 65 guaranteed for the rest of his life. This sounds appealing until we consider inflation. Recently, inflation has been around 2% per year. The average since 1916 has been about 3% per year. So a bad period would be around 4% per year.
The purchasing power of Jim’s $1000 per month of income would be hit by 10 years of inflation before he starts to collect. Here is the purchasing power of Jim’s first payment at the three different inflation levels:
If Jim makes it to age 85, the purchasing power of these payments will be eroded much further:
These are not runaway inflation scenarios. Even if inflation stays at 2%, Jim’s payments shrink uncomfortably. The attractiveness of BMO’s new offering depends on investors not thinking about inflation.