David Hanzlik

By Dave Hanzlik

In today’s inflationary environment, uncertainty is haunting investors. People are seeing the impacts of inflation directly hurt their income. Take a salaried worker who just received a fixed 5% percent raise, usually something that would be worth celebrating – if inflation is 5% or more this year, that raise is just keeping the worker’s salary on par with inflation, not increasing their purchasing power. Many Americans are unfortunately grappling with this weakening of their income right now. To help secure their financial future, some are turning away from riskier investments and looking for more stable options like annuities, which reached record sales levels in 2022.

But like any other investment, the principle of compound investing directly plays a role in making your money work for you. Since annuities focus on meeting investor needs and goals over the long term, like with other investments, the earlier you invest, the more accumulation potential and benefits may be provided – meaning there will be a significant reward for weathering the inflationary storm we’re experiencing today.

Making the Most of Your Money

Investing in annuities as early as possible, even when the market may not appear the most optimal, always makes a big difference in the size of your retirement nest egg. For example, assume a 60-year-old has $500,000 to invest and wants to access this money at age 65 on retirement. There is a multiple-year guaranteed fixed annuity offering an annual rate of 5% guaranteed for five years. The potential investor suspects that interest rates may rise in the next few years but doesn’t want to wait with their desired retirement date quickly approaching. With annual crediting and the compounding of gains, this individual’s account grew to $638,141 after five years at 65. This significant growth was made possible by the money’s long period in the market, and the steady returns fixed annuities have to offer.

On the other hand, trying to time investments into the market may result in significant losses to potential growth, something investors always consider in eras of uncertainty. Assume the same 60-year-old individual decides to wait to invest their money because they think interest rates will rise. Luckily for them, they were right. After withholding $500,000 from the market for two years, there is a multiple-year guaranteed annuity offering an annual rate of 7% guaranteed for three years. With annual crediting and the compounding of gains, their account grew to $612,522 after three years at age 65. While they received a much higher crediting rate and thought it was better to wait for them to increase, they missed out on the time value of money for the first two years and ended up with a smaller account value at age 65 than they would have if they purchased the annuity at age 60. These examples demonstrate that time really is money, and trying to time the market means losing out on valuable growth potential.

What Could be Lost?

The current volatility might cause some fearful investors to leave their money in savings accounts to avoid market downturns. Unfortunately, this strategy isn’t inflation-proof either. People who keep their money in low-interest accounts lose purchasing power over time if the interest rate on that account is lower than the inflation rate. For example, suppose the same 60-year-old individual decided to put $500,000 in a savings account with an interest rate of 0.25%; after five years, that money would be worth $506,281. However, after adjusting for an average inflation rate of 2% per year, that money would only be worth approximately $458,555 in today’s terms. Compare this to the guaranteed fixed annuity offering at an annual rate of 5% for five years, which after adjusting for an average inflation rate of 2% per year, would be worth approximately $577,984 in today’s terms; this is $119,429 more than the nest egg provided by the savings account. Keeping cash in savings proves to be a very costly mistake, and this example serves as a reminder of how important it is to invest, even during turbulent times.

While the current economic environment is challenging, annuities offer a great investment vehicle, whatever your risk tolerance and financial goals. While timing is important, it is never too late to purchase an annuity contract. And the earlier, the better. Today is as good of a day as any to get started.

About the author: Dave Hanzlik

Dave Hanzlik is Vice President of Annuity & Retireent Solutions at CUNA Mutual Group, a leading insurance, financial services and technology company focused on helping people achieve financial security through all life stages.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any entities they represent. Hypothetical examples are used for illustrative purposes only. 

CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Annuities are issued by CMFG Life Insurance Company (CMFG Life) and MEMBERS Life Insurance Company (MEMBERS Life) and distributed by their affiliate, CUNA Brokerage Services, Inc., member FINRA/SIPC, a registered broker/dealer, 2000 Heritage Way, Waverly, IA, 50677. CMFG Life and MEMBERS Life are stock insurance companies. MEMBERS® is a registered trademark of CMFG Life Insurance Company. Investment and insurance products are not federally insured, may involve investment risk, may lose value and are not obligations of or guaranteed by any depository or lending institution. All contracts and forms may vary by state and may not be available in all states or through all broker/dealers.