Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Fixed Annuity Income
Transcript
- Lucas: I was catching up with a retired family friend last week. She showed me her annuity statement – same insurance company, same monthly check for the last decade. But she's calculated that her purchasing power has dropped by about 15 percent over that time. That's the quiet erosion we're talking about today – how inflation is eating away at fixed annuity income. Luna: That's a brutal reality check. So many people think 'I bought an annuity, I'm set,' but they don't realize that if inflation averages even 2 or 3 percent, over ten years you've lost a lot of ground. Lucas: Exactly. And right now, with the latest CPI reading at 332.6 – still above the Fed's 2 percent target – the erosion continues. Even though headline inflation has ticked down from last year, it's still eating into those fixed payments. Lucas: And honestly, if this kind of inflation analysis has helped you think about your finances differently, you can support the show at buy me a coffee dot com slash fexingo. Listener support is what keeps us ad-free and focused on practical money conversations. Luna: Yeah, even a small contribution goes a long way. Now, let's talk about the options someone with a fixed annuity actually has. Lucas: First, a quick refresher: A fixed annuity is a contract with an insurance company where you give them a lump sum, and they promise to pay you a set amount every month for life or a certain period. The key word is 'fixed' – the payment doesn't change, so inflation is the enemy. Luna: So if you're getting $1,000 a month today, and inflation runs at 2.5 percent, in ten years that $1,000 has the buying power of about $780. That's a real problem for retirees on a fixed budget. Lucas: Right. The ten-year breakeven inflation rate is currently around 2.20 percent, so the market expects inflation to stay above the Fed's goal for a while. That means the erosion isn't going away soon. Luna: What can someone actually do if they already own a fixed annuity? Lucas: Option one: If you're still in the purchase phase, choose an inflation rider. This increases your payment each year by a fixed percentage – typically 2 or 3 percent – or ties it to the CPI. The trade-off is that your initial payment will be lower, sometimes 20 to 30 percent less. Luna: But if you plan to live a long time, the cumulative effect can be huge. A 3 percent escalating annuity can double your payment in about 24 years. Lucas: Option two: Consider a variable annuity that invests in stocks or inflation-protected securities. The payments can rise, but you take on market risk. With the S&P 500 near 7,354, some investors might be nervous about entering now. Luna: So it's not a perfect solution for everyone. What about people who already have the fixed payments and can't change the contract? Lucas: They can partially annuitize – only use part of their savings to buy the fixed annuity, and keep the rest in assets that can grow, like stocks or I Bonds. I Bonds are particularly interesting right now because their interest rate adjusts with inflation. Luna: That's what we've talked about before – pairing guaranteed income with a growth bucket. For example, if you have $200,000, you might annuitize $150,000 with a rider and put $50,000 into I Bonds or TIPS. Lucas: Exactly. The I Bonds will keep up with inflation, so you have a mini-hedge. And with the current CPI still elevated, the composite rate on I Bonds bought before November might be better than the next rate. Luna: So the takeaway is: if you're counting on a fixed annuity for all your retirement income, you're exposed. Consider layering in some inflation protection, whether through a rider, a variable product, or separate savings. Lucas: Right. And if you haven't bought yet, don't ignore the impact of 2 percent annual increases – it's a small price now for a lot more security later. Retirees' biggest risk isn't market volatility; it's underestimating inflation. Luna: Thanks for the reality check, Lucas. Next week, we'll look at another hidden inflation trap – so stay tuned.