Using Annuities For Maximum Inflation Protection

Inflation Eroding MoneyEveryone is concerned about inflation.  With the government printing money and household incomes stagnant, our purchasing power feels less powerful than a decade ago.  Inflation may not be measured very high right now, (2.1% for 2012, Per CPI-U) but it is a real force to be reckoned with.

Traditionally, annuities are seen as the antithesis of an inflation protected strategy.  But this is not necessarily true.  Let me explain why.

1)      Use Annuity Income Just For Essential Expenses:

The first step using annuities properly in anticipation of inflation is to only use an annuity to produce the income you need, rather than allocating all your assets to an annuity to produce income for both wants and needs.

Allocating just enough resources to a fixed income to cover your essential costs like food and housing leaves remaining assets free to target more inflation protected growth opportunities.

Furthermore, when your income is secure, your remaining assets invested for growth do not have pressure on them to be sold to buy groceries.  You can mitigate the risk of reverse dollar cost averaging with a secure income floor.

2)      Find The Highest Yield Annuity

High yield annuities like Secondary Market Annuities offer a good rate of return in any market environment.  Making a safe, prudent investment in an asset that has a reasonable yield to maturity is never a bad move.

3)      Ladder Your Annuities To Create Future Flexibility

Liquidity in a portfolio is a holistic measurement.  Not all investments in a portfolio need to be liquid at all times.  While annuities may be more il-liquid, your other investments likely provide all the flexibility you really need.  Also, to counter the il-liquidity of annuities use laddered lump sums or deferred income streams can create future liquidity and flexibility and allow you to reinvest in the future in new market environments.

Here are a few kinds of SMA’s that give you future flexibility

  1. Shorter term lump sums
  2. SMA’s with step ups in income payout help to increase the dollars in later years
  3.  Buy deferred income cases to step up income
  4. Use Life Contingent SMA’s that have the potential for early liquidity

4)      Keep The Yield In Perspective

Historical yields for stocks and bonds vary depending on the measurement term, the index, dividends, and tax rates.  Historical yields for safer assets like CDs are also hard to quantify, and generally incur annual taxation.

When considering SMA’s, remember that a 5% yield is a very good yield on high quality, very safe assets.  Not making a decision or staying in cash due to ‘fear’ of inflation, or fear of commitment, is a 0% yield in a 3% environment… a -3% purchasing power.

Doing nothing IS a decision, and a detrimental one at that!

Doing nothing will cost you a lot… doing something that is good and safe will not lose you money.  Make prudent decisions, preserve future options with lump sum payouts, use increasing income streams, and you will make you a good rate of return while creating options for the future.

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