Inflation is rising, making some investors reconsider the value of fixed annuities. But fixed annuities can still play an important role in retirement planning.
A fixed annuity is a type of annuity that provides you with a specific sum of money at a fixed rate of return for a fixed period of time. You give a life insurance company a sum of money, and it gives you payouts for a certain period or for life.
Because the rate of return is fixed, it may seem as if fixed annuities would not be ideal for inflationary environments such as the one we’re experiencing today.
While the consumer price index, a widely used gauge of inflation, increased just 0.5% in March 2011, it was up 2.7% year over year. That means you need $102.70 to buy something today that cost just $100 in 2010.
Still, fixed annuities have a number of advantages, including tax-deferred accumulation and guaranteed lifetime income.
In other words, you don’t have to worry about market downturns robbing you of income.
Some types of fixed annuities may also help fight inflation.
Consider the equity-indexed annuity, which pays a minimum interest rate during market downturns while providing a bonus during upturns.
That’s not to say you should put all your money in a fixed annuity. But a fixed annuity, when combined with other inflation-fighting assets, may play an important role in a portfolio.