The number one component of a solid retirement plan is making absolutely certain your income will keep up with inflation. A rising income is the only solution to make sure your standard of living does not decrease over your retirement years. No retirement plan is complete without some sort of inflation barrier. Variable annuities offer one solution to combat inflation.
Variable Annuity Mechanics
A variable annuity works much like any other annuity. You invest a certain amount of money and any interest that money accrues is tax deferred until you take a withdrawal. In a variable annuity your interest is earned by the investments you choose when you invest. The investment options include mutual fund-like choices called sub-accounts. For practical purposes, sub-accounts work exactly like mutual funds which include bond funds. The annuity usually has a fixed interest option as well.
Variable annuity contracts have surrender charges just like every other annuity unless you are working with a fee-only advisor. If so your annuity may have a very low charge or no charge at all for withdrawing money. Like all annuities you need to study the surrender charge schedule to make sure the charges will not affect your retirement income plans. Growth and income is your goal.
Variable Annuity Growth
Variable annuities are designed specifically for growth. You must have a growth portion included in your portfolio to keep up with inflation. Just think about how much gasoline cost 20 years ago. Was it about 87 cents a gallon? Your income has probably grown considerably since then. Now consider your retirement. In twenty years, gasoline will be more expensive. Will it grow to $8 a gallon? Hopefully not! Actually it would be more $16 a gallon to keep in line with how much gas prices have increased over 20 years. Could you afford $16 a gallon? The answer is yes! Why?
Growth is the answer to combat inflation. If your income is growing slightly more than inflation then your purchasing power remains the same. The goal of investing for retirement is future income. It doesn't matter that you will have $3,000,000 in assets when you retire. It matters that the $3,000,000 will produce a certain amount of income that is indexed to inflation so that you purchasing power either grows or remains the same.
To learn more about inflation and how it can erode your purchasing power read - Inflation And Variable Annuities - You May Not Be Protected!
Image by Dee & Tulah Monstah at Flickr.com
No comments:
Post a Comment