Financial markets have been less than stable over the past decade or so. This leaves many people wondering what is going to happen with inflation in their retirement years and how to account for that inflation in their retirement planning. In the U.K.’s Money Observer, Faith Glasgow asks “What kind of annuity works best?” Research done from an annuities broker overseas also applies to those living and retiring in the United States. They analyzed data to see if an annuity adjusted for inflation is worthwhile, since payments start lower than they do with a fixed annuity. The farther away from retirement you are, the harder it is to forecast what will happen with inflation at the time you retire. But taking into account some personal factors will allow you to make a more informed decision about whether or not you need an inflation-adjusted annuity.
Inflation-adjusted annuities, referred to as escalating annuities in the U.K., start payments much smaller than fixed annuities do. Payments increase at a specified time and amount over the life of the annuity so that you are getting more money when you are older and goods are likely to have increased in price. Men and women who are alive at age 65 will live an average of 18 and 21 more years, respectively. It takes around 14 years for your inflation-adjusted annuity income to rise above the alternative fixed annuity income. Your total payout is worth more after 24 years. Based on the research done for this study, researchers found that fixed, or level as they refer to them in the U.K., annuities are better values for people who have an average life expectancy. If you smoke or have an increased risk of living less than the average life expectancy, an inflation-adjusted annuity is often not worth the cost to you. Also take into consideration the fact that the older you are, the less money you’ll probably be spending on extras like travel and leisure activities.
Evaluate inflation estimates for the future along with making an educated guess on your life expectancy before purchasing an inflation rider for your annuity. If you expect to live a long time and are concerned about increasing prices in the future, the rider might be a good addition to your portfolio. It may not be necessary for those expecting to live an average life span for a few different reasons. Inflation can also be accounted for in other areas of your retirement planning portfolio as well. Speak with an advisor and go over all of your possible scenarios before buying any retirement product.
Written by Rachel Summit