Inflation Risk in Retirement
For those concerned about inflation, living on a fixed income is a challenge. An increase in your expenses that you need to pay for with a fixed amount of income is not a fun recipe.
In addition, inflation is a real risk that you must address, even in our prolonged low inflation / bull run market. Inflation averages +/- 3.3 % per year, and this includes the runaway years in the 1970’s. Here’s a link to the federal CPI inflation calculator.
How to deal with inflation risk in retirement?
The only way to deal with inflation is to ensure that your assets and income both grow enough to maintain – or increase – your purchasing power.
Now, if you’re wondering how a fixed-income asset like an annuity could possibly fit into this equation, here are two key factors:
- Adding the right annuity to your holdings can increase the stability and safety of your overall portfolio. An increase in assets with secure principal help offset volatility from variable principal growth assets.
- Safe & secure income allows more allocation to growth assets. Using a pure-play safety contract like an annuity allows you to more aggressively allocate remaining portfolio assets purely for growth.
An Annuity Strategy In Your Portfolio
When you use an annuity to create a foundation of income in your portfolio, you create a guaranteed floor to build off of. This allows you to invest remainder assets for growth and for the creation of more income streams in the future.
Using a guaranteed income annuity, for example, you have a set level of income you can count on no matter what. You don’t need to worry about market volatility impacting your income, and any money not invested in the annuity can be left in the markets to grow over time.
The conventional Wall Street advice to invest in a balanced portfolio of stocks and bonds and use a systematic withdrawal strategy is highly risky by comparison.
When you try to simultaneously protect your money, while making it grow, and demand that money to produce income for you, you compound and exponentially increase risks.
Selling stock in a down market to produce income is flirting with sequence of returns/ reverse dollar cost averaging risk.
Relying on volatile asset prices for known income needs is a market risk.
And relying on a finite pool of money for an income of an indefinite period of time is longevity risk.
A traditional asset management and systematic withdrawal strategy leaves you holding each of these risks, and they all combine and compound on each other.
How An Annuity Mitigates Inflation (And Various Other) Risks
In one step, an income annuity removes market volatility, sequence of returns, and longevity risk from your shoulders, making your overall portfolio far more resilient and stronger.
And as I mentioned before, an added benefit of a floor level of income from an annuity is that remainder assets can be invested for growth and additional income in the future. Increasing asset value and increasing income is inflation protection, and it’s all made possible by starting with a guaranteed income from an annuity.
Put yourself in a position of strength with 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.
It just makes sense.
Reach out to us if you’d like to:
- Schedule a 1-on-1 video call to discuss your specific needs and situation
- Ask questions about products, carriers, or DCF Income Payments
- Discuss how a DCF Income Payments and newly-issued annuities may (or may not) fit into your portfolio
Nathaniel M. Pulsifer, Owner of DCF Annuities
(800) 246-1932 | [email protected] | Linkedin