What is an ANNUITY?
An annuity is a contract from an insurance company that offers to pay income to you at regular intervals, for a period of time you specify, all in exchange for your contribution (premium). These contracts may contain other features as well.
Why buy the ELM INCOME ANNUITY?
This contract, issued by Principal Life Insurance Company, is for your consideration…
Why buy the ELM INDEX ANNUITY?
This contract is for your consideration if you are not yet ready to turn your assets…
Inflation — Plan for Declining
Purchasing Power
We all know from experience that prices will likely go up over time; that is why retirees need to consider inflation when planning for their lifelong sustainable income. The following chart shows the impact of inflation on our purchasing power over time:
For example, consider a retirement income plan that starts at $15,000 per year and then increases by 3% each year to anticipate inflation. The chart shows that in year 15, for example, the income payment would have to be increased by about 50% (i.e., to about $22,500).
In our earlier case study Kathy and John retired in 1971 and followed such a plan, a 3% per year increase to anticipate inflation in prices. But, in the 15 years following their retirement, actual inflation averaged more than 3% per year. If our retired couple adjusted their withdrawals for actual inflation, their withdrawal in 1985, year 15, would have been $37,396, more than twice as high as their first year payment.
There are ways to anticipate inflation which involve holding assets that over time can be expected to keep pace with inflation. We will not comment on them, except to say:
- Inflation needs to be anticipated.
- Retirement assets need to be dedicated to providing the growth necessary for withdrawals to at least keep pace with inflation.
- Some income annuities can serve this purpose, because they offer options to increase income payments to cover inflation. Other alternatives to cover inflation could be investments like equities, real estate and Treasury Inflation Protected bonds.