It wasn’t that long ago, that inflation was the topic of choice but, after a protracted period of next-to-no inflation, and perhaps a touch of deflation, not much has been heard about this inevitable fact of our lives for quite some time now.
The latest annual inflation rate for the United States is 1.1% through the 12 months ended February 2014* and the average annual inflation for the past 100 years or so has been about 3.2%. Effectively this means that if you are not earning at least the inflation rate on your money, you will, in fact, be running your retirement at a loss.
It is our view that, given the cyclical nature of things, and the fact that the supply of money and/or credit is ever expanding, one should be thinking about inflation again, and particularly how to protect against its ravaging effect on retirement savings. In addition, the erosion of your retirement savings is clearly made a lot worse in the case where you suffer market losses.
As readers of our posts will know, we are unashamed proponents of Fixed Index Annuities (FIAs) as a major component of retirement savings and income.
How can you then use FIAs to protect against inflation in the years ahead should we see an increase therein, as many are now predicting. In many respects, the marketplace will take care of most of the work for you. As present, for instance, fixed rates and caps are relatively low given the current status quo. However one can expect that as inflation rises, so too will interest rates and insurance companies will have to raise rates in order to remain competitive. The marketplace and competition will always be your friend, and insurance companies must constantly stay in line or risk losing market share to their competitors – and the insurance marketplace, as you may know, is extremely competitive.
One can also look to what one thinks will happen to stocks and bonds in an inflationary market and position oneself accordingly. We have already discussed in previous weeks the current trend towards FIAs which allow for a greater share in the upside of the market, and certainly this is one way to ensure that you get as much upside as possible whilst also protecting yourself against any downside risk through the use of the FIA. It really is the best of both worlds bearing in mind that you will only ‘share’ in the market upside and not get the full increase in return for never sharing in any downside.
Certainly, if you think that the market will do well and if you can afford to be directly invested, then by all means plunge in. But we only ever recommend doing this with funds which you are not depending on for essential retirement income – i.e. funds where any losses therein will not create unnecessary hardship in the future. Otherwise your safe choice is a FIA with as much share in the upside as possible.
Whether you believe that another inflationary cycle is coming or not; educate yourself, stay informed, and make the correct choices with the help of a trusted advisor.
* As published by the US government on March 18, 2014.
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