WHY DO YOU NEED TO WORRY ABOUT INFLATION?
Today’s investors are retiring during a time when one in five people can expect to live beyond their 90th birthday. Americans, in general, are enjoying longer life expectancies and greater health, and the world’s population of centenarians is projected to reach the 3.7 million mark come 2050. Obviously, the longer you live, the more money you’ll spend, and the more you’ll see the price of things go up. Consider this: the cost of a new car in 1955 was around $2,200. In 1985, the average price for a new car rose to $9,005. In 2015, the average cost for a new car was $33,560. How much will prices go up during the time of your retirement?WHY EVERY PLAN NEEDS A LITTLE COLA
A hundred dollars today won’t buy you the same amount of groceries as the $100 20 years from now. Since 1975, the Social Security Administration has been conducting annual cost-of-living adjustments (COLA) to ensure that the purchasing power of its benefits isn’t eroded by inflation. The amount of the COLA increase is measured by the Consumer Price Index (CPI). When you are living on a fixed income, the rising cost of basic human essentials means that your quality of life could, over time, go down. This is why every retirement plan needs a little COLA. You want your income stream to have an element of COLA built in so that as you age, your income sees an increase in proportion to today’s economic environment of rising prices. CHEAP AND EASY VERSUS COMPLICATED AND MORE EXPENSIVE The cheapest way to generate an income using an annuity is to avoid using income riders. You can do this by taking advantage of an immediate annuity, but it won’t give you inflation protection. The check will be for the same amount of income year after year for as long as you live. To get an element of inflation protection built into your income plan, you have two choices for guaranteed payments that increase over time: 1) an indexed annuity, or 2) a variable annuity. These two solutions couldn’t be more different from each other, and they may come with additional fees.- The indexed annuity is sometimes referred to as an inflation-indexed annuity. It links indirectly to a market index so that it can give you an element of growth that can protect against inflation. You get to choose the market index, and the returns are generally significantly higher than the average annual rate of inflation, currently at 3.22 percent. Indexed annuities do not have fund management fees because they do not directly participate in the stock market, and they offer principal guarantees so that you can’t lose money during times of market decline.
- The variable annuity or variable immediate annuity can also be structured to give you lifetime periodic payments. It gives you an element of growth through direct participation in the stock market. You are restricted as to which investments you can choose, you’ve assessed a fee for the management of these investments, and these investments can lose you money.