Wondering why inflation is important for your retirement income? Start here if you want to learn how annuities can protect you against inflation and which kind of inflation rider to purchase. Abaris has broken down the issue in an intuitive and straightforward way. It’s hard to read, listen to, or talk about anything regarding finances without the word “inflation” coming up. In fact, a lot of people hear the word used all the time, but don’t really understand what inflation means, and how it relates to their money or retirement. So what exactly is inflation? It’s an increase in the price levels of goods and services in the economy over time. In other words, prices increase over time, and inflation is the rate at which they’re increasing. When there is inflation, your purchasing power drops, meaning that the same $100 today, for example, will be able to get you less “stuff” in the future. Over the last 20 years the inflation rate has hovered somewhere between 1% and 3%, and the federal reserve targets 2% inflation levels. How does all this relate to retirement and your annuity? In two ways. First of all, expected inflation, among other factors, influences interest rates. Interest rates determine how much your annuity will cost to purchase. Secondly, the inflation levels determine how much the payments you receive from your annuity will actually buy, meaning the purchasing power of your annuity payments. When it comes to protecting yourself from inflation there are three simple steps you can take. The first is to figure out your fixed expenses, so your grocery, housing, medical, travel, and leisure expenses, minus your pension and social security payments. Next, estimate how much those expenses will be in terms of future dollars. At Abaris, we can help you through this process. The final step is to purchase an annuity with an inflation rider tied to actual inflation levels. It’s better to get a CPI-U (consumer price index for all urban consumers) than to guess what the inflation rate will average out to be. That said, not all the insurers have CPI-U inflation-adjusted products, so make sure you’re choosing wisely. It’s hard to navigate the annuity market. There’s tons of information out there, and not all of it is true. There’s a myth that fixed annuities do not protect you against inflation. But with an inflation rider, you are in fact protected. Which brings up a second misconception: that buying an inflation rider means you don’t have to worry anymore about inflation. That’s not true either; you’re still subject to the inflation that occurs between the purchase date and the income start date. The inflation rider is merely a part of the process. It can be confusing, we get it. That’s where we come in, here to help answer any questions about how to protect yourself when you make your next annuity purchase.