Billowing inflation has hit most of us hard over the last year.
Surging prices for essential products like energy, food, and gasoline have emptied our bank accounts and put many dreams of homeownership and career advancement on hold.
Soon-to-be retirees and those on a fixed income have been among the hardest hit.
What may have seemed like enough monthly earnings to cover expenses a few years ago may no longer be enough to live on, especially if inflation continues to climb.
Fortunately, there are ways to help protect your clients' retirement from the effects of rising prices.
Inflation-protected annuities can provide a steady stream of post-retirement income that scales with the cost of living, meaning your won't be at the mercy of rising prices.
How Inflation Affects Retirement Earnings
The U.S. Bureau of Labor Statistics reported that the consumer price index (the metric for measuring inflation) had reached 8.5% by the end of March 2022.
That's the highest it's been since the early 1980s, when war spending, loose lending practices, and soaring gasoline costs created an unprecedented balloon in consumer pricing that devastated the finances of many.
While we'd like to think the government and head banking officials learned something from the '80s, the fact remains that today's snowballing inflation rates have many soon-to-be retirees worried their previous financial plans won't have enough purchasing power to sustain them through their twilight years.
A high Consumer Price Index means those on a fixed income will get less out of their investment than they put into it.
For example, say your client's retirement plan guarantees that the client will receive a static payment of $600 every month for the rest of the client's life.
Adjusted for inflation, a $600 monthly income in 2020 would need to increase to $651 in 2022 to have the same purchasing power.
Fixed payments without inflation protection can be disastrous for retirees because the monthly expenditures they plan for within their monthly budgets may no longer be within their reach.
Benefits of Inflation-Protected Annuities
According to a 2021 study by senior economists at the Center for Retirement Research at Boston College, the value and wealth equivalence of money invested in annuities holds relatively steady over time, even as mortality and interest rates fluctuate dramatically.
Social Security is one component of retirement income with a built-in cost-of-living adjustment feature.
Some clients may use purchases of multiple annuities, or ordinary annuities without special inflation-adjustment features, to cope with rising prices.
In some cases, however, clients can simply use annuities with built-in inflation protection features.
An annuity that is protected from inflation is designed with a rate of return that adjusts according to the inflation rate over time.
