One of the benefits of a fixed annuity is the certainty of a regular income for the life of the annuitant. While this guarantee is an extremely attractive component of a retirement income plan, special attention needs to be paid to the long-term effects of even a mild period of steady inflation. With fixed payments, the annuitant will be faced with the prospect of a decline in the purchasing power of the income received from the annuity, a potentially devastating prospect should inflation remain at high levels for any length of time.

Retirement planning should begin early in life, but it's not unusual for many clients to only seriously think about retirement income as they approach the age of 65. With the increasing lifespan of the average senior, this means that they are looking at receiving income for a period of 20 years or longer. That time period could well include a spell of inflation lasting several years. Consider that a fixed annuity purchased 20 years ago has seen it's purchasing power reduced by almost 50% today.

Annuity providers need to be aware of the need to discuss the potential impact of inflation on the purchasing power of the proceeds from the annuity and the various methods that can be used to offset these losses. With inflation having been held in check for the last few years, annuity holders have been shielded from these losses, but as the economy grows, the specter of rising inflation may once again come to the forefront.

Accounting for inflation can be accomplished by the purchase of an annuity that is linked to the CPI, or the use of an annuity with annual increases predetermined by contract. While these types of products may offer a lower initial income, the protection provided by the inflation hedge may well be worth the cost.

Another method may simply be the reinvestment of a portion of the payments into other fixed income products, taking advantage of the dollar cost averaging and increasing return of these investments as they rise to meet the current market rates.

Regardless of the method chosen to deal with the effects of inflation, its introduction to the discussion of future retirement income is an essential part of retirement planning and asset protection. Without the consideration of rising inflation, the client may be left in the position of a seriously diminished income level in the years to come.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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