Given our current economic situation, inflation risk is a genuine concern for those retiring within a few years. Concerns about inflation are also a typical objection seniors have when considering purchasing an annuity. Many of the more popular annuity products insurers offer only pay a fixed monthly income not adjusted for inflation. For example, you might buy an annuity that pays a fixed, lifetime amount of $2,000 per month. But, if the inflation rate increases to 10%, the purchasing power of your payment will only be around $1,800. As most seniors know, diminished buying power often leads to a lowered lifestyle in retirement.


If you’re hesitant to consider annuities as part of your retirement matrix, you may have other options. Since annuities have so many upsides, you don’t want to overlook them as you plan for retirement. That’s why you may want to discover other means of offsetting inflation risk.


Perhaps the most significant advantage of having an annuity in your portfolio is that it is the one financial product that allows you to guarantee the protection of your principal while creating retirement income that you cannot outlive. This guaranteed income, of course, depends on the claims-paying ability of the particular insurer you choose. That’s why it’s critical to avoid buying an annuity until you’ve consulted at least one retirement income advisor who specializes in safe money products.

However, in an economy where few people still have defined benefit (pension) plans, having an annuity allows you to create your “private pension” plan.


If you are thinking about purchasing an annuity for retirement, you must factor in the inflation risk associated with a fixed payout. While it’s true that annuities are subject to inflation risk, their many upsides make them a wise choice for those who desire income for life, a hedge against longevity risk, or who want to leave money to loved ones.


There are some effective strategies to stave off inflation, such as:


You could look into an “inflation-protected” annuity (IPA).

Fixed annuities that guarantee real rates of return at or above the inflation rate are called “inflation-protected annuities.” Inflation-protected products utilize a predetermined formula designed to increase income streams annually. These increases in payouts are often tied to the Consumer Price Index (CPI) or another measure of inflation. There is a tradeoff involved, though. You will be getting a significantly lower monthly payout in exchange for possibly getting more income in the future when you use an IPA.

You could adjust your annuity’s payment periods.

What if, instead of basing your annuity payouts on your lifespan, you had the option to design an annuity that pays over a predetermined number of years then stops? Planning income streams in this manner might be a valuable tool as you try and maximize both Social Security and Medicare.

Many Americans increase their monthly Social Security check by 8% for each year they delay filing after age 62. Many experts believe the ideal scenario for Social Security is to wait until age 70 to start your payouts. Unfortunately, some seniors find they need to retire years before they file for Social Security. This situation could cause a cash flow crisis. A fixed annuity can be a valuable and efficient tool in this situation.

With the help of an annuity expert who uses advanced planning techniques, you could fund an annuity that will give you a fixed monthly payout during the gap between when you first retire and when you can file for Social Security. For example, let’s say you want to retire at age 65 but would also like the increased Social Security check you’ll get by waiting to file until you are 70. You could fund an annuity that, at age 65, starts paying you a comparable monthly income for the five years until you file. Although there will still be some inflation risk potential for the fixed annuity during this period, the increased benefit inside the Social Security formula may potentially offset this risk. Your fixed annuity payout becomes a retirement income “bridge,” giving you predictable cash flow while waiting for Social Security.


A similar bridging concept might also work with Medicare. If you decide to retire at 60, there is a five-year gap before you can use Medicare. This gap means you will need to purchase an individual health care plan until your Medicare kicks in. With the correct advanced planning methods, you could fund a fixed annuity to help you pay your health insurance premiums during the gap years.


You might have tax savings to counteract some of the inflation risks.

Generally, annuity payouts are either “qualified” or “non-qualified” payments. Qualified annuities generate payouts from 401k, IRA, or pension plan funds. Qualified annuity payments are therefore subject to ordinary income tax. Non-qualified annuities, on the other hand, are funded with after-tax money.


Tax advantages associated with annuity contracts could increase your net income, providing you with a cushion against associated inflation risks. According to IRS guidelines, 70% of every non-qualified payment is a “return of basis.” The remaining 30% counts as ordinary income. The tax liability on a non-qualified annuity’s monthly payments is prorated over your life expectancy.

Winnett’s Wisdom:

Don’t let inflation risk concerns keep you from looking into annuities to help strengthen your retirement portfolio. While inflation is always an issue, advanced, creative planning methods can help mitigate inflation risk. If you’d like me to evaluate your unique situation, contact my office. Mention the Safe Money Trends website, and I will send you a free copy of my book.