Q: I am retired. As I see it, there are at least two key factors when considering investing for retirement (including annuities): 1. How long will I live. 2. What will inflation be in the future. With the huge increases in national debt, it seems to me that we are facing significant inflation in the future. Does it make any sense to invest in an annuity that pays me $1,000 per month for life — but down the road that $1,000 will buy only $500 of goods and services?


A: A major drawback to lifetime annuities is the lack of an inflation safeguard. One private lifetime annuity is built to hedge against consumer price inflation. Several others offer some degree of loose protection. 

A spike in the inflation rate can’t be ruled out. But a sustained upward spiral in the overall price level well into the stratosphere — I don’t see it. My own perspective is that the U.S. has shifted from an economy where inflation was the norm to one of essentially anchored prices subject to periodic inflation outbursts and occasional deflation.

That said, what if a sustained rise in prices breaks out, say, something like the experience of the 1970s and early 1980s? Perhaps long enough to fuel fears that inflation could spin out of control?

In either case, the investing time horizon becomes critical. For example, when inflation broke out in the post-World War II era, bonds were the worst-performing investment over the following 12 to 18 months, according to economists at the International Monetary Fund. Once past that time period, however, bond returns started doing better than inflation, thanks to higher yields and greater price stability. (The IMF’s 2009 scholarly survey — ”Inflation Hedging for Long-Term Investors” — is worth reading.)

That research shows that commodities do well when inflation is on the rise. Equities and bonds do poorly. But stocks and bonds become attractive and commodities lose their luster after 12 to 18 months, on average. Three fixed income securities will preserve the purchasing power of a dollar if inflation takes off. Short-term Treasury bills pretty well match change in the rate of inflation. Treasury Inflation Protected Securities (TIPS) are designed to hedge against inflation. So are I-bonds.

Diversification still pays. So does parking some funds in safe places, like FDIC-backed accounts. Depending on how concerned you are about high and rising inflation, you could invest more heavily in Treasury bills, TIPS and I-bonds.


Chris Farrell is senior economics contributor, “Marketplace,” and commentator, Minnesota Public Radio.