If you’ve been hearing a lot more about inflation in the news recently, it is because the current economic realities dictate it. And with so much uncertainty, it’s not out of place to wonder how this may affect you and your finances. If you’re close to retirement age, this worry is even more pronounced. Unlike people who are still in employment, there’s little retirees can do to increase their income. They can’t pick up more shifts or apply to better-paying jobs; essentially, they’re stuck with the same income while everything gets more expensive.
If you’re yet to retire, you can still do something about securing your future. Your financial advisor may have told you about annuities and how different this financial product is to other retirement or investment accounts. They might even have told you that some types of annuities can help with inflation. Is that true? Well, the simple answer is “yes.” But in finance, there are no simple answers, so below, we shed more light on how annuities can help with inflation and what that means for your future.
How do annuities help with inflation?
If you are familiar with annuities, then you’ll already know they provide a guaranteed source of income in retirement. You sign an annuities contract and save some money monthly (or at once) in an account. Then, when you reach a certain age, you start getting monthly payouts from the account. But that’s not all; the money you saved up is invested, and your capital is protected from market losses. So, after some 15, 20 years of saving up, you’d have accumulated a solid chunk of interest on your original investment.
So, how does this help with inflation? The first is that you get regular income every month. If you don’t have a lot coming in from Social Security or a pension fund, then that steady income will help you stay solvent. If you do have additional income, the extra from your annuity gives you more wiggle room. It can also help you save up or invest in anticipation of rainy days. Secondly, you can have your annuities contract set to pay an increasing amount every month. That means you design your payouts such that they keep up with rising cost of living, ensuring that your income rises with inflation.
What types of annuities can offset inflation?
While fixed and variable annuities can offer some protection from inflation, the most ideal option remains the fixed-index annuity. The best thing about this type of annuity is that your income remains at the same level every year, no matter how the stock market behaves. Then, you can include income riders in your contract to give you even more flexibility. For instance, an increasing income rider means your income rises every year – however, this depends on the performance of the annuity’s underlying assets.
Additionally, fixed-index annuities may have a rider that adjusts your income with the level of inflation. In this case, your payouts are set to keep pace with the consumer price index and offer you some protection. There’s a little point to keep in mind, though: your initial payouts may be lower with this option than that of someone with a level income rider.
What can you do now?
So, what next? Well, the first thing you need to do is learn more about annuities, and confirm if it’s something you’re interested in for the long-run. We can help you with this, and our in-house retirement planning expert can spare 30 minutes so you can ask your pressing questions related to finance, retirement planning, or annuities. You can schedule a consultation via this link.
Furthermore, you may prefer to conduct a quick stress-test on your retirement account now to see how protected you are from Black Swan events (like the 2008 financial crisis or a global pandemic). To do this, quickly fill the form on this page, and we’ll get the ball rolling.