Inflation Risks Impacting Retirement

Inflation Will Diminish Your Purchasing Power Over Time

Inflation, over time, reduces your purchasing power. In other words, it causes the prices of everyday items to increase year over year. For example, at an average rate of 3%, it would take almost $200,000 in 20 years to buy what $100,000 buys today.

The inflation rate, which is a measure of the rising cost of goods and services is, at any given time, affected by multiple factors that are out of our control. For example,

  • A tight labor market results where employers pay more money to attract fewer available people.
  • Government restriction or loosening of the money supply (federal monetary policy changes)

US Historical inflation has been 2.5% – 3.0%

  • The highest US inflationary period was in 1917 at 19.66%. (Not too bad all things considered. Venezuela is projected by the IMF to have 1,000,000% inflation in 2018!).

Just like with higher taxes that result in losing purchasing power, higher inflation results in lower purchasing power too. Because it takes more money to buy the same things year on year, this effectively lowers your retirement income!

Having a retirement plan that helps combat the effects of inflation will prevent the loss of purchasing power over time.

Visual Capitalist
Courtesy of: Visual Capitalist

Risk: Rising Inflation at Retirement

You are 65 and are retiring today with a yearly retirement income of $50,000. If inflation were 3%, in 20 years you would need $90,000 of income to buy the same items that you would buy today. As you leave work for the last time, you decide to splurge and buy a $100.00 bottle of champagne to celebrate with your wife. Fast forward 20 years and you decide to celebrate 20 years of retirement bliss with a bottle of champagne. You would need to take $180.00 with you to the store!

A more troublesome scenario exists when there is rising inflation AND you are taking income withdrawals in a declining market environment. As a result, this can have a double impact on your retirement income. First, you will need to withdraw more money to maintain your current purchasing power. Second, as you pull more money out, you are losing principle in your retirement accounts. Consequently, this is an easy way to potentially run out of money in retirement.

Use A Fixed Index Annuity To Create A Retirement Income Stream That Keeps Up With Inflation And Maintains Your Purchasing Power

Fixed index annuities are one of the best ways to mitigate the effects of inflation on retirement income. One of the more popular features of newer annuity products is the ability to increase your annual income each year based on inflation rates. This feature is designed to ensure your retirement income keeps up with inflation so you don’t lose purchasing power.

Fixed Index Annuities offer:

  • Tax deferred growth
  • Benefit of participating in market growth
  • Assurance of never losing money in down markets
  • Protected retirement income that’s guaranteed for life – while maintaining liquidity of your assets
  • Income options that guarantee annual increases
  • Accelerated Benefit Riders to cover chronic and terminal illnesses
  • Peace of mind…Never outliving your income!

Alternative solutions may include:

  • Work Longer (paychecks/raises hedge against inflation)
  • Modifying lifestyle
  • Defer Social Security benefits (deferring results in larger monthly payments which is a natural hedge)
  • Invest in real estate
  • Invest in equities

For retirees concerned about losing purchasing power and uncertain markets, Fixed Index Annuities are a popular solution that offer income protection and peace of mind.

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Properly Planning For Inflation At Retirement Keeps More Money In YOUR Pocket

Example: Annuity For Lifetime Income


You are 60, married and have saved $500,000 for retirement. Your life expectancy is approximately 85 years which means you will have 25 years to enjoy retirement. You and your spouse have determined that you will need $50,000 per year to live on. The average couple receives $28,000 per year of Social Security benefits. That means you will need to pull $22,000 per year from your $500,000 savings to fill the gap. This equates to a 4.5% annual draw.

If inflation were 3%, brokerage fees 3% and you are withdrawing 4.5%, you would need to consistently make 10.5% in the market to break even.

Conversely, you could purchase a retirement annuity with inflation protection that offers a guaranteed income stream for life and maintains your purchasing power.

Inflation Risks Impacting Retirement Raleigh NC

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