You might not realize it now, but inflation can dramatically erode your financial security if it isn’t taken into account, especially as you enter retirement. Overlooking inflation’s long-term impact is a common, yet costly mistake when shopping for annuities
While inflation-protected annuities offer a way to mitigate this risk, they come with a significant upfront cost. In fact, an inflation-adjusted immediate annuity can cost roughly 50% more than a comparable fixed annuity, and that gap narrows only slightly with age.It is important to account for inflation in one way or another so that your money doesn’t run out faster than you planned.
The True Cost of Inflation
Inflation may feel gradual year to year, but over the span of a retirement it can have a devastating impact on purchasing power. A dollar saved today won’t buy the same amount of goods or services 10, 20, or 30 years from now. One of the most common mistakes retirees make is underestimating how much inflation will erode their income stream. For those relying on fixed annuities or other fixed-income sources, this means the steady payments that once felt sufficient may struggle to keep up with rising living costs.
For example, a 55-year old man using $100,000 to buy a fixed annuity with lifetime income would get a monthly payment of $420. Compare that to an inflation-adjusted annuity where your payments would start at $268 per month. That equals out to a 57% increase between the two types of annuities. That number goes down to 39% if you wait ten years and purchase the annuity at age 65. While there is a steep increase in the cost of an inflation-adjusted annuity, it is important to account for inflation in some of your investments, whether it be your annuities or not.
For many retirees, inflation ultimately forces a difficult balancing act. To make savings last, spending habits must be monitored more closely, yet relying solely on fixed-income products can mean steadily losing purchasing power. This is why some financially conservative retirees may need to shift their strategy and consider a greater allocation to equities, which historically outperform bonds and other asset classes during inflationary periods.
While equities carry more risk, even modest stock market gains typically outpace bonds when inflation and rising interest rates erode bond values. Pairing annuities with equity exposure or other growth-oriented investments can help strike the right balance, preserving stability while still providing the potential to keep pace with rising costs over time.
Talk to an Expert About Protecting Your Retirement Income
Planning for retirement in an inflationary world can feel overwhelming, but you don’t have to make these decisions alone. Annuities, equities, and other income strategies each have their trade-offs, and the right balance depends on your unique goals, timeline, and comfort with risk. Speaking with an experienced annuity expert can help you weigh your options, understand the true costs, and build a plan that keeps your retirement income secure for the long run. Learn more about annuities and our top pick annuities, and reach out to our experts to get a consultation.
