inflation riskInflation is the gradual erosion of the purchasing power of your dollar. Inflation has averaged about 3.3% per year from the start of the US Government data set in 1910 to today- this includes the galloping years in the 1970’s.

An annuity itself will not protect you from inflation. But by using an increasing income stream, you can maintain your purchasing power. That simply means planning increases to income in later years so your purchasing power keeps pace.

Key Takeaway:

The right annuity or other guaranteed fixed income frees your remainder assets to be invested for growth.  When the pressures of competing demands for safety and income on assets is removed (by the purchase of an annuity), overall portfolio safety increases.  A portfolio is better positioned for growth and is therefore more inflation protected when guarantees are added in.

inflation calculator

Here is the US Government’s official inflation calculator

What Can You Do About Inflation Risk?

While an annuity won’t protect you from inflation- nothing will- what an annuity CAN do, however, is to secure your income.

One of the primary benefits of ‘flooring’ your income with a guaranteed annuity is that you can invest the rest of your assets for more growth.

It is growth, and exposure to assets that are resilient and increase in value with inflation, that will protect you in the long run.

Conversely, Wall Street’s usual recommendation is to be increasingly weighted to bonds as you get older, for safety and income. Following this poor advice, not only are your assets at grave risk of loss due to interest rate rises, but you are likely NOT invested in assets that can jump with inflation, such as equities, metals, or real estate.

inflation risk

Here is an alternative measure of inflation, from

Alternate Measures of Inflation

Lies, damn lies, and statistics… there are just very few things in life that are absolute.

Government statistics are certainly not one of them, so I encourage you to consider other measures of commonly quoted statistics. Inflation is a big one, and is a great resource.

  • The U.S. government published an average inflation rate of 3.07% between 1983 and 2006.
  • Over the same period,’s John Williams’ research concluded the real figures produce an average inflation rate of roughly 7.03%
  • Pick Your Favorite

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Inflation Risk In Retirement

Inflation is the steady erosion of purchasing power of your money.

Inflation Risk Summary

Inflation needs to be recognized, and many people shy away from a fixed income due to inflation fears.

However, a fixed income frees your remainder assets to be invested for growth and inflation protection WITHOUT the pressures of safety and income on those remainder assets. Therefore, a guaranteed income is a critical component of an inflation protection strategy.

  • No One Knows What The Future Inflation Rate Will Be…
  • No One Knows If The Future Holds Inflation…
  • Or If It Holds More Deflation
  • Spend The Lowest Amount Possible To Get The Necessary Guaranteed Income… Then Invest The Rest For Growth

So what is a reasonable inflation rate expectation? The government is in the business of manufacturing statistics. Statistics they share do not often reflect reality on the ground.

Inflation statistics such as the consumer price index also exclude certain categories of costs that have a real effect on people’s daily lives, like energy.

inflation table

In its simplest form, inflation simply deals with the decline in purchasing power of your dollar. The example highlighted above in red shows that $1000 in 10 years at a 4% inflation rate, will have the purchasing power of $676 today.

Inflation or Deflation? Or Both?
inflation or deflation

So which one is it? Inflation or deflation? How about both…

Economists, government, and the media all have no idea really what our future holds. It has to do with both the velocity of money, financial system liquidity, and the health of the economy.

As the cartoon shows, we have deflation when prices are falling but you don’t have income to buy anything. Real estate is went thru a deflationary cycle – prices fell to relative lows, interest rates are very affordable, but try getting a mortgage. It’s next to impossible.

Inflationary signals are just as prevalent- government printing massive amounts of money and bailing out banks with asset purchases, driving interest rates lower, and hard asset prices like gold climbing for the sky. All of these are strong inflation signals.

inflation risk summary

So what can you do about inflation?

Well, you can do anything to stop it.

You can however take some actions to protect yourself from inflation. In retirement, this often means purchasing income streams that increase over time.

It also means making sure you have some allocation to investments that are likely to keep pace with inflation.

Finally, above all it means just being aware when making long-range plans.

leonardo fibonacciDiscounted Cash Flow and Inflation Risk

Fibonacci is most famous for the “Golden Rule” numerical sequence found in nature.

But Fibonacci also first described discounted cash flow in the year 1202.

Today, discounted cash flow is central to retirement planning.

Discounted Cash Flow determines how long our retirement lasts, and is the driver of calculating Inflation and what a dollar is worth tomorrow …

Discounted cash flow is also at the heart of inflation- inflation is a discount rate on cash dollars…  So there is a potential double whammy here-

Low Interest Rates means it takes more money earning a low yield to create income to live on… and also, if inflation is higher than we think (as ShadowStats assrts) then those dollars you ARE able to generate and spend are worth less next year than this year.

Higher savings are needed now to last increasingly long lifetimes, and looming inflation means even more current day dollars will be needed to secure the future…

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