Question

Becky is a 31 years old and knows she needs to start a retirement plan. She currently works in a bakery and is worried about how inflation would affect her retirement plan. Which annuity would be a good fit for her needs?

Answer 1

An inflation-indexed annuity is a suitable retirement plan for Becky, who is worried about the impact of inflation. This plan adjusts payments to match inflation, preserving purchasing power over time.

Step-by-step explanation:

Becky, who is 31 years old and currently working at a bakery, is concerned about future inflation and its impact on her retirement plan. The type of annuity that would best serve Becky's need to account for inflation is an inflation-indexed annuity. This type of annuity provides a retirement income that is adjusted to rise with inflation, ensuring the purchasing power of the retirement income does not erode over time.

To understand how inflation can impact retirement funds, we can look at Rosalie the Retiree's example. Rosalie's one-time payment of $20,000 in 16 years, with a consistent 6% inflation per year, would be substantially less in today's dollars.

By calculating the rise in the price level over the 16 years, one can determine the reduced future value of the lump-sum payment. This example illustrates why retirees must consider the impact of inflation on their fixed income, as traditional pensions often do not account for increasing costs of living.