Help! My retirement is Shrinking!

With the continuous losses in the stock market many folks have put their money in secure vehicles like CDs but now CD rates are below inflation which means that their money will not buy as much next year as it does this year and the interest they are earning on the CD is too little to even keep pace with the ever growing costs.  In short they are losing money everyday that they own a CD with interest rates below the current inflation rate.

In 2010 the average inflation rate has been 1.7% while the average interest rate on 1 year CDs is .49% up to 1.5% on 5 year CDs, neither of which will keep your money from shrinking in value.  Think of it this way if you had $1000 in a CD making .49% you would make you $4.90 (minus $1.23 in taxes) during this year and your $1003.67 will buy you the same in the next year as $986.61 this year.  Yep even with the gains you lost money because it buys less this year than it did last year.  So what do you do with  your nest egg so it is safe and still protect it from lost value due to inflation?

I like the way fixed annuities look for this ... they offer substantially higher rates than CD's (Farm Bureau's are at a guaranteed 3% and some even offer a bonus of 2% on the first year) and they grow tax deferred (so you will get second year interest on 100% of the interest you earned in the first year).  Using that same example your $1000 in a fixed annuity would earn $30 (taxes are deferred) and that $1030 will buy you the same amount in the next year as $1012.49 so you still have the same (or at least a little more) buying power that you started with.

This may not be the strategy for everyone but for those wanting to preserve their nest egg it is a much better option than losing their purchasing power every year until they have lost all that they worked for through their whole lives.

Take a look at fixed annuities to see if they make sense for your retirement plan, I think you will find that they can be an important part of your overall plan.