"New" inflation is up to old tricks

JANUARY 21, 2022

During these unprecedented times, it may be wise to ask your financial professional how current inflation may impact your long-term retirement plans

The topic of inflation has divided economists into two camps. Some feel this current bout of inflation is a transient issue that will dissipate as ports work through the backlog of containers at their docks and as countries continue to distribute vaccines that allow people to return safely to work. Yet others are concerned that this is a longer-term problem society has to grapple with and resolve. Regardless, the underlying issue of scarcity is affecting our day-to-day lives, and driving up the prices of material goods.

During these unprecedented times, your best strategy may be to shop local. Businesses rooted in your community are more likely to have the kinds of relationships with suppliers that allow them to source local goods when larger supply chains have stalled. For example, a local butcher may have contacts with area farmers, who can deliver their supply of turkeys even if larger stores are fresh out. Local shops and artisans are eager to ensure the goods you order arrive on time, straight out of their workshops.

You may also want to ask your financial professional how current inflation may impact your long-term financial plans. While inflation hasn’t been a major source of concern in the US since the early 1980s, a conscientious financial planner will calculate an assumed inflation rate based on historic data. Over the last 50 years, the average rate of inflation has been 3.79 percent.While we’re not used to everyday consumer goods like food rising in price so rapidly, inflation has always played a role in the economy. Healthcare and college costs, for example, have experienced significant inflation over the past 25 years. Even the cost of a car you’ve been eyeing may have been driven up by a supply shortage, which itself may be driven by a shortage of microchips. These mini-shortages lead to mini-inflations that can add up to impact your cost of living, and eventually, your retirement plans.

Social Security is a key part of retirement planning that is already tied to inflation rates. Because of the inflationary pressures between 1969 and 1974 (the average annual rate of inflation doubled to 12% in that five-year period), Congress included an automatic Cost-of-Living Adjustment (COLA) stipulation, within the 1972 Social Security Amendments.2 These amendments protect the buying power of retirees’ Social Security income. The first COLA adjustment began in 1975 and was an 8% increase over the prior year.The Social Security Administration indicated  that, based on the recent rise of certain consumer goods pricing, the 2021 COLA will be 5.9%, which is the highest COLA increase since 1982.4 To put that in perspective, there have only been three years in the last 12 in which inflation was low enough that no COLA increase was necessary.5

It can be complicated to determine how these price increases may impact your odds of outliving your retirement savings. You and your financial professional should discuss ways to manage the inflation risk inherent in your mitigation financial plan. You may want to consider an investment vehicle that can provide a guaranteed stream of income, no matter the number of years it needs to extend through retirement. Annuities, for example, can help alleviate the risk that longevity and inflation combined can pose to your retirement goals. After reviewing your spending needs in retirement, you and your financial professional can ascertain whether an annuity product would be a suitable addition to your current investment portfolio. The reliable income that an annuity can provide, combined with the inflation-adjusted income Social Security provides, can be a powerful approach to covering baseline costs. Then, you can consider other assets to fund the nonessential but desirable goals you have for retirement. Variable annuities have the added benefit of supplementing that guaranteed baseline with opportunities for modest growth.

For investors who have not lived through a time when inflation was a concern, this risk may seem monumental in scope. Don’t hesitate to call your financial professional to review your plan with inflation in mind and discuss the ways annuities could play a role in mitigating this risk. Whether inflation dissipates over time or signals the beginning of a new era in the marketplace, you can likely find a reliable path to retirement.

What is an Annuity?

Annuities are long-term, tax-deferred vehicles designed for retirement.  Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met.

1. Value of 1970 US Dollars Today, Inflation Tool, https://www.inflationtool.com/us-dollar/1970-to-present-value

2. John Waggoner, “History of Social Security COLA increases by Year,” AARP, October 13, 2021.

3. Ibid

4. Ibid

5. Ibid

Annuities are issued by Jackson National Life Insurance Company (Home Office: Lansing, Michigan) and in New York, annuities are issued by Jackson National Life Insurance Company of New York (Home Office: Purchase, New York). Variable products are distributed by Jackson National Life Distributors LLC, member FINRA. May not be available in all states and state variations may apply. These products have limitations and restrictions. Contact the Company for more information.

Jackson® is the marketing name for Jackson Financial Inc., Jackson National Life Insurance Company®, and Jackson National Life Insurance Company of New York®.