We all know that inflation gradually erodes the value of our dollars, and you’re probably aware that this is one of the main reasons for investing in the stock market. If you hide your money safely under your mattress, it becomes incrementally less valuable each year depending on the inflation rate. To keep pace, you have to find ways to make it grow at least as fast as the value of a dollar is falling.
But you may not have heard about inflation as an argument against putting too much of your retirement money in a fixed annuity, which pays you a fixed amount for the rest of your life. That safe, comfortable income stream may work perfectly for you today, but will it be enough to live on 20 or 30 years in the future?
If you’re curious how much damage inflation can do to you over longer time periods, look at a 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, just 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 that 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. Put another way, the annuity would be paying less than half of what you need to maintain your current expenses into the later years of your retirement. If inflation were to average 4%, the future income needed to match today’s $100,000 rises to $266,584.
This is not an argument that annuities are to be avoided in all cases; a guaranteed lifetime income may have its place in some financial plans. But a few inputs into this calculator can go a long way toward making the case that investments that grow over time are vitally necessary to afford a comfortable future retirement. The safety of a guaranteed fixed income is a false promise, because it doesn’t protect you against the near-certain, incremental danger of yearly inflation.
Contributed by Bob Veres