If you’ve never heard of annuities and how they can protect against inflation in retirement, then know that you’re not alone. Inflation can be one of the biggest threats to the purchasing power of your money after you retire. With annuities, you can hedge against inflation to ensure your money keeps up with price increases in a guaranteed tax-free manner.
In this post, you’ll learn about how annuities work and some of your options for getting the retirement income protection you need.
What Is an Annuity?
Annuities are insurance products that provide a steady stream of income in the future. They can be purchased as stand-alone products or in conjunction with other investments, such as mutual funds or stocks. They’re often used to provide a guaranteed income stream for retirement or other long-term goals.
The money in an annuity comes from your contributions and investment earnings. You can’t withdraw it without penalty until you reach age 59.5 (unless you’re using it for medical expenses). But once you do start taking withdrawals, they’ll be taxed as ordinary income at whatever rate applies at that time.
Types
Annuities come in many different shapes and sizes, offering different levels of risk and return. Generally speaking, there are three main types:
- Fixed-rate
- Indexed
- Variable
Fixed-rate annuities guarantee a specific rate of return over the life of the investment. Indexed annuities are similar to fixed-rate ones, except they also provide a minimum rate of return based on changes in the market index, such as the S&P 500® Index or Dow Jones Industrial Average. Variable annuities offer investors the opportunity to invest in mutual funds and other securities that have the potential to increase or decrease in value over time.
The best annuity for you will depend on your goals, needs, and risk tolerance.
How Does an Annuity Protect Against Inflation in Retirement?
Annuities are one of the most popular vehicles for retirement planning. They’re also one of the best ways to protect against inflation in retirement.
Annuities can protect you against inflation because they offer several unique features:
- Fixed Interest Rates – Annuities have fixed interest rates that do not change over the lifetime of the contract. This means that your principal amount will earn interest at a fixed rate that does not change over time, and so too will your income payments be based on this same fixed rate of interest.
- Guaranteed Interest Rates – Some annuities have guaranteed interest rates which means that regardless of what happens in the economy, your income payments will always be based on this same rate of interest (unless otherwise specified).
- Income Payments – These income payments are tax-deferred meaning that they may grow tax-free until withdrawn from the contract.
Is It a Good Idea to Use an Annuity to Combat Inflation in Retirement?
Yes! Using an annuity is one of the best ways to combat inflation in retirement.
The rate of inflation during the past 20 years has been low, ranging from 1% to 3%. The average rate of inflation over the past 100 years is 3.2%. Therefore, if you are retiring with a fixed income, it is very likely that you will not be able to maintain your standard of living during retirement.
To combat this problem of inflation in retirement, many people use annuities as part of their retirement planning strategy.
Why Would You Need One?
Annuities aren’t right for everyone, but they can be useful if you want to:
- Create a steady stream of income during retirement
- Protect against inflation
- Gain some control over how your assets are distributed after death
When planning for retirement, it’s important to build safety measures that capitalize on the expected and unexpected changes in the economy. Contact Roberts Tax and Retirement Planning for trustworthy tax planning and retirement guidance or to begin the process of investing in annuities as a potential solution. You won’t regret it!
