Fixed Payments:
what a guaranteed $2,000 a month buys in year 25

A payment that never changes is a payment that falls every year

A guaranteed $2,000 a month sounds like certainty. What is guaranteed is the number, and the number is nominal.

At 3% inflation:

By year 24 the payment buys half what it did at the start.¹ That follows from the rule of 72: divide 72 by the inflation rate to get the years until prices double.²

At 2% the halving takes 36 years instead. The rate matters enormously over a retirement, and it is the one input the recipient cannot control.

Where households meet this

Pensions without a COLA. Most private pensions pay a level benefit. Social Security is adjusted annually by statute; a private pension usually is not. A household reading both as "income" is holding one that tracks prices and one that does not.

Level-payout annuities. A fixed annuity quotes a monthly figure for life. The quote is attractive partly because it is nominal. An inflation-adjusted version of the same contract starts materially lower, which makes the level version look better in the comparison that gets shown. 2 Products Share the Word Annuity: only one is priced close to fair covers how the two products sharing that word differ.

Whole life death benefits. A policy bought at 40 with a $500,000 benefit, paying out at 85, delivers about $132,000 in the purchasing power of the year it was bought, at 3% inflation. The benefit is guaranteed and the guarantee is in nominal dollars. Term vs. Whole Life: the commission tells the story covers the wider comparison.

Long-term care policies with a fixed daily benefit. A daily limit set decades before the claim is a nominal limit, against a cost that has generally risen faster than general inflation.

The pattern underneath

Every one of these is sold on a guarantee, and every guarantee is a nominal guarantee. The seller carries the investment risk and the longevity risk. The buyer carries the inflation risk, and that allocation is rarely stated in those words.

This is a concealment by which number gets quoted, in the sense Money Words, Defined: the 370 terms that decide what you pay gives the term: the monthly figure is prominent, accurate and nominal, and the real figure over the life of the contract appears nowhere in the sale.

What to ask before signing anything with a fixed payment

• Is this payment adjusted, and by what index? If the answer is no index, the payment is

fixed in nominal terms for the whole term.

• What does it buy in year 20 at 2%, 3% and 4%? Three numbers, one line of arithmetic

each. The spread between them is the risk being transferred to you.

• What does the inflation-adjusted version cost? Where a rider exists, the price difference

is the market's own quote for the risk you would otherwise carry.

• How long will I hold this? Twenty-five years of erosion is a different decision from

five.

What to do about it

Match adjusted income to unavoidable costs. Income that tracks prices is best pointed at costs that also track prices — housing, food, medical. Level income covers costs you can choose to reduce.

Hold something that grows. A portfolio with growth assets is the usual answer to a fixed payment sitting alongside it. Retirement Withdrawals: the tax order that preserves your NEST covers the drawing order; $180,000 In, $610,000 Out: what 30 years of $500 a month does covers what growth does over the same horizons.

Count Treasury inflation-protected securities and I Bonds as the direct hedge.³ Both adjust principal or rate with the price index, so they are among the few instruments quoted in real terms at all.

The short version

A fixed payment falls in purchasing power every year. At 3% inflation, $2,000 a month buys $1,488 after ten years, $1,107 after twenty, and about half by year 24. Pensions without a COLA, level annuities, whole life death benefits and fixed daily long-term-care limits are all nominal guarantees. The seller carries investment and longevity risk; the buyer carries inflation risk, and the sale rarely says so. Ask what the payment buys in year 20 at 2%, 3% and 4% before signing.