How You Can Keep Your Annuity Safe
Unless you keep your annuity safe from inflation, the payments you receive today will be worth a lot less in a decade or two. Although inflation has averaged less than 3% since the 1990s, it is unwise to assume it will remain to be that low. You may be wondering how inflation affects annuities.
How Inflation Affects Your Annuity
As an example, say you currently have an annuity that pays $1,000 per month. Should prices rise 2% yearly, then the value of $1,000 ten years from now is the same with the value of today’s $820. Just imagine the further drop in value after another ten years.
You can protect your annuity from inflation by going with an option called indexing. Your payments will be much lower at first, but they will increase if prices rise.
You could receive 30% to 40% less in the first few years of your annuity. At first, such an option seems unattractive and some people are convinced they will not live long enough for inflation to take its toll on their annuities.
Then again, there is always the danger that they might be wrong. To lighten the negative consequences of both scenarios, some people place half their money into an annuity with inflation protection and the other half into one without it.Before committing to any one option, make sure you understand how inflation affects you in particular and what level of protection suits your unique situation.
