Could Annuities Cushion You from Inflation?

Annuities_Contract_With_Insurance_CompanyYou’ve probably heard a lot about inflation lately and how you can potentially combat it. One way to cushion you from inflation is with annuities.

Before we discuss using annuities, let us look at what  is fact and what is fiction with combating inflation.

Many economists will tell you not to worry about inflation. That’s because the consumer price index (CPI), which is a widely used gauge of consumer spending, increased 3.6% year over year in May 2011.

While that’s not exactly low, so-called core inflation, which eliminates volatile food and energy costs, increased a relatively weak 1.5%.

That places core inflation below the U.S. Federal Reserve Board’s target of 2% – and the 2% to 2.5% rates prevailing before the financial crisis of 2008 and 2009.

That said, many inflation watchers believe CPI numbers may understate inflation.

Over the past 30 years, the U.S. government has changed the way it calculates inflation. For example, today’s 3.6% CPI would have been more than 10% using calculation methods in place before 1983.

How can you help cushion your portfolio from the potential effects of rising inflation?

You may want to consider annuities as a way to cushion you from inflation. What is an annuity? It is a contract with an insurance company. You make payments in one lump sum or for a certain amount of time.

In return, the insurance company will provide you with payments at regular intervals either immediately or at some point down the road.

While fixed-rate annuities may not seem ideal for inflationary times, it may actually be better to have a guaranteed income stream than to try to invest in asset classes you think could cushion you from inflation. That’s because asset classes can perform differently than we expect them to.

Like all investments, annuities have pros and cons and may work better for some investors than others. Your financial advisor can help you determine if annuities are the best way to cushion you from inflation and if they are suitable for your individual financial circumstances.