Annuities Helping with Inflation
This is a typical case where I’m walking through the usual stuff and trying to make sure that Paul understands all of his annuity options. This business is more about communication than anything else and most of my effort goes into fully understanding exactly what you and everyone else wants. If you can tell me your exact goals then I can give you an honest opinion along with the pros and cons of all other options. At that point it’s up to you and whatever choice you make is done with a solid education so you can move forward with confidence.
As is the same with many other cases, the topic of inflation is a big part of Paul’s concerns. Inflation adjusted annuities don’t come for free and there’s no magic solution to fight a devalued dollar in the future. This gives me an opportunity to address the topic in a case study. It’s another way of looking at how annuities and guaranteed income benefit a retirement plan. Much time has been spent this year showing everyone how major investment institutions are coming around to the idea but don’t forget that you could have been hearing it around here for a long time.
Paul’s case is pretty straightforward but it’s his question about inflation that inspired me to share some details as it relates to his primary concern. Every case is unique and this has a little spin as well that may not relate to most people, but the general similarities are close enough. He’s 63 and would like to retire at 65 but things look a lot better if he waits until age 67. I’m simply a numbers guy so just tell me what you have and what you want to make of it and I’ll let you know how easy it is to make it happen. When Paul shared his numbers, I was able to objectively tell him that retirement is possible whenever he wants.
Time is money and money is time. The longer he waits the better it gets and the sooner he retires the more it will cost. He has enough for either scenario. Digging into the details found us a common ground and made waiting for full retirement manageable for both the numbers and his lifestyle. Not everyone can do it in stages like this but regardless it’s a good example that shows why every case is unique.
Here’s how this case works. Paul can work two more years which is acceptable to him and then dial back his hours to give him more free time. Since he is saving a good amount of money each year that is when he’ll stop. The reduced income will not allow him to continue saving but he doesn’t need to. He’s trading money for time. Working reduced hours keeps him at his current standard of living and he’ll do that for two more years before quitting entirely just when he reaches full retirement age. Social security then comes into play and in addition to that he will need a modest amount of additional income to keep spending the way he is now.
The first focus is for him to figure out the timeline and for me to give him an idea of how best to make up the income gap. The easiest solution is to take about one third of his savings to buy an annuity that is deferred for four years. That will give him an additional $20K per year of income so he can continue his current lifestyle and golf or travel as much as he likes. It’s an excellent bridge for his final working years and will take a tremendous amount of stress from his current life because retirement is now guaranteed to happen.
As with many others, his first question is whether the annuity is adjusted for inflation. It’s not but we still need to account for inflation and it’s now my job to explain how that works. Inflation adjusted annuities only cost more so it’s not a viable solution in most cases. It may give someone peace of mind but it’s best to see inflation from a different angle. Using a third of the money now to guarantee all retirement income needs leaves him with a tremendous amount of flexibility. If he doesn’t ever need to touch two thirds of his portfolio then the additional growth over time will be more than enough for spending adjustments as the value of a dollar declines.
Click here for a past newsletter that addresses the topic of inflation adjusted annuities directly.
I’ve done this in enough cases that show he will have substantially more growth throughout retirement if he doesn’t need to dip into his investment portfolio regularly. That won’t happen until he needs to pull required minimum distributions six years after full retirement. That in itself will provide for potential spending increases or continued savings outside of an IRA if he doesn’t need the money. It’s as simple as a case gets when a relatively small commitment produces guaranteed income with the flexibility of a major portion of assets being left for growth and future planning opportunities.
Stocks are historically the best asset to use to fight inflation but carry too much risk to consistently produce income. Annuities are the best way to generate retirement income but there is no true inflation protection. Blending the two options provides steady income and continued growth to handle a decrease in purchasing power over time. It’s a difficult leap for many to make but annuities help with inflation because it allows you to carry more risk with other assets to achieve the long-term growth necessary. Future planning opportunities and flexibility are improved dramatically. After 21 years I can tell you that no one regrets it in the long run. Explore the option with your retirement and I’d be happy to prove it to each of you individually.
Enjoy your weekend!
Further Readings:
All You Need to Know to Buy an Annuity
Are Fixed Indexed Annuities a Good Investment?
Podcast Episode 132: Annuities Helping With Inflation
Last Updated on August 30, 2024 by Bryan Anderson
I used the flooring technique to estimate my $ need in retirement. Subtracting Social Security to get to the retirement red zone. Purchased the Allianz ABC to fill the gap. 25% bonus to the income side, floor of zero, S&P 500 capped at 5% but a 250% multiplier. Zero fee on a single pay. In distribution phase there is growth potential between 0-7.5% yearly. This should help with inflation protection. Best of all I can remain moderately aggressive and continue to convert IRA to Roth prior to age 73. Part of my legacy play.