Inflation has averaged about 3%. That means if you need $5,000 to live on when you retire, you will need $10,000 if you live 25 years. Inflation is the silent [retirement] killer because you never get a statement showing how much spending power you have lost to inflation. Annuities alone cannot protect you from inflation. But it is a big and integral component of a strategy to beat inflation.
By having a foundation of guaranteed, pension-like income as a foundation, you can take more risk with other money for better potential growth. The annuity income ‘foundation’ increases your time horizon on the money at risk and… it provides a base of certainty to live on which prevents you from ever having to spend money that has gone down in value—a BIG NO-NO for retirees!
The ‘risk’ associated with loss is that you might need it to live on and will not be able to wait for the market to return to new highs. Having guaranteed annuity income can decrease or eliminate this loss. This decreases or ‘mitigates’ your exposure. One pile of money cannot provide lifetime guaranteed income, and expect to increase in value at the same time. It would be like expecting a sailboat to also perform as a speed boat. You can have a boat that conserves gas or one that goes fast, but not both. This gets to the heart of our approach, namely, to put yourself in a position of strength by building a foundation of guaranteed income to cover your essential expenses. Then the rest of your assets can be more aggressively invested, yet your overall risk profile is quite safe.
Wall Street’s solution is to own more bonds as you get older, for safety and income. This is quite risky! When interest rates go up the value of your bonds goes down. That means you LOSE PRINCIPAL in an investment that was sold as safe. Also, if you have that money in bonds, it is not available for growth, which you will need unless you have way more money than you will ever need. If you follow this ‘conventional’ old advice it could very well be at your own peril. Take control of your retirement. Think for yourself. Ask questions. Just because something has been taught for 30 years does not mean that it is right or best.
Conventional advisors tell retirees to avoid annuities due to inflation fears. Of course, that means you must buy bonds from them (hmmm). But, either they do not know or they don’t want you to know that guaranteed income from an annuity really frees up other assets to be invested for growth to keep up with inflation because you do not have the pressures of safety and income on those assets. Income from an annuity is actually a very important part of an optimal inflation protection strategy.