Inflation and the False Promise of Fixed IncomeSubmitted by BCR Wealth Strategies on June 25th, 2018
It probably comes as no surprise to you that one of the main reasons for investing in the stock market is to protect against inflation, which gradually erodes the value of our dollars over time. While keeping your money safely under a mattress certainly protects against market risk, it does not shield you from inflation risk as your money steadily decreases in value. You become unable to purchase the same amount of goods in the future that you previously could afford with that same amount of money. To be able to afford the same lifestyle in the future, you have to find ways to make your money grow at least as fast as the value of a dollar is falling.
What might come as a bit more of a surprise is using inflation as an argument against putting too much of your retirement money in a fixed annuity. A common type of fixed annuity would be teachers’ retirement. While having a fixed amount paid out to you over a lifetime certainly brings some peace of mind, do you get the same level of comfort when you think about that fixed amount not having the same purchasing power 20 or 30 years in the future? There are other types of income and investments such as social security and bonds that are also particularly susceptible to inflation. While social security provides a cost of living increase most years, many argue that it does not keep up with senior citizen costs like the increase in medical expenses.
If you’re curious how much damage inflation can do to you over longer time periods, look at this free online calculator available here: https://www.calcxml.com/do/ret05. You can input your current age and the income you’re receiving, and the site will calculate what your future income would need to be at some point in the future solely to maintain your current lifestyle.
Let’s say you’re 65 today, receiving $100,000 a year from an annuity. How much of your future lifestyle will that annuity pay you when you’re 90?
Assuming an inflation rate of 3% a year, you would need $209,378 in the year you turn 90 to afford the same things you do today. So your other investments would have to contribute more, in that year, than what the annuity was paying you. In other words, the annuity would be paying less than half of what you need to maintain your current expenses in the later years of retirement. If inflation was to average 4%, the future income needed to match today’s $100,000 rises to $266,584.
This is not to say that annuities have no place in certain financial plans and should be avoided at all costs, but there is an argument that investments that grow over time are vital to afford a comfortable lifestyle in the future. The safety of guaranteed fixed income is a false promise because while it does protect you from one risk, it exposes you to another.
Some of the material above was prepared by Bob Veres Inside Information.