Take What You Need to Know Before Locking in a “Stable” Income
Fixed annuities offer guaranteed payments, but over time, inflation quietly eats away at your purchasing power. Without cost-of-living adjustments (COLAs), your income might stay the same on paper—but feel like much less in real life. Here’s what causes this, what it means, and how to solve the problem before it’s too late.
How Fixed Annuities Work (And Why This Becomes a Problem Over Time)
A fixed annuity pays a guaranteed dollar amount each year, regardless of market performance. You can buy it with savings, a rollover IRA, Roth IRA, 401(k), or other qualified retirement account. Once income starts, it’s predictable—but it doesn’t grow unless you pay for a rider or use a different product type.
The Problem: Inflation continues even if your annuity income doesn’t. After 10, 20, or 30 years, your purchasing power drops dramatically. If your fixed annuity pays $30,000 per year today, that same $30,000 could only buy $15,000–$20,000 worth of goods in the future—or worse.
Solutions to Preserve or Increase Your Purchasing Power
1. Use a GLWB Rider With Increasing Payouts
- Interest-based Increases: Your income grows based on earned interest, typically linked to an index.
- Fixed Percentage Increases: 3%–5% annual increases (varies by product).
- CPI-Based Increases: Income rises based on the Consumer Price Index (rare but powerful).
Pros: Lifetime income with potential for growth
Cons: Rider fees and lower starting income
Who Needs This: Anyone concerned about longevity and inflation
Who Doesn’t: Short-term retirees or those with other inflation-hedged income sources
Funding Options: IRA, Roth IRA, 401(k), cash
Other Insurance to Consider: Life insurance to protect beneficiaries if the annuity is exhausted or surrendered early
Annuity Type: Fixed Indexed Annuity with GLWB
2. Buy a Fixed Indexed Annuity (FIA) Without Annuitizing
Fixed indexed annuities offer index-linked growth with downside protection and can be used to defer income until needed. You can withdraw money gradually to pace income with inflation.
Pros: Market-linked growth with no downside
Cons: Not guaranteed income unless paired with GLWB
Who Needs This: Investors who want principal protection and inflation potential
Who Doesn’t: People needing a fixed amount of guaranteed income now
Funding Options: Qualified or non-qualified funds
Other Insurance to Consider: Long-term care insurance to avoid spending down income during health shocks
Annuity Type: Fixed Indexed Annuity
3. Purchase a Fixed Annuity With a COLA Rider
Some fixed annuities allow you to buy a COLA rider that increases your income by a fixed percentage annually (e.g., 2% or 3%).
Pros: Predictable rising income
Cons: Lower starting payment; limited availability
Who Needs This: People worried about future inflation
Who Doesn’t: Short-term income users or people on tight initial budgets
Funding Options: Retirement accounts or cash
Other Insurance to Consider: Life insurance to leave behind an inheritance if the annuity dies with you
Annuity Type: Immediate Fixed Annuity with COLA
4. Stagger Multiple MYGAs With Different Terms
Multi-Year Guaranteed Annuities (MYGAs) can be laddered to mature at different points. You reinvest at prevailing rates, which may help combat future inflation.
Pros: Flexibility, no market risk
Cons: No guaranteed income, reinvestment risk
Who Needs This: People with large lump sums who want better yields than CDs
Who Doesn’t: Income-dependent retirees needing predictable cash flow
Funding Options: IRA, Roth IRA, cash
Other Insurance to Consider: Annuity with GLWB for long-term income; long-term care insurance
Annuity Type: MYGA
5. Use Life-Only SPIA Paired With Life Insurance
A Single Premium Immediate Annuity (SPIA) with life-only payout gives the highest income possible. Pair it with a life insurance policy to protect your heirs if you die early.
Pros: Maximum income possible
Cons: No refunds after death
Who Needs This: Early retirees before age 59½ or those needing max monthly cash
Who Doesn’t: People concerned about leaving money behind
Funding Options: After-tax cash for SPIA; underwriting needed for life insurance
Other Insurance to Consider: Term or permanent life insurance
Annuity Type: SPIA
Why Inflation Protection Is Essential
Even modest inflation can cut your spending power in half over 20 years. If you live a long time, this becomes a serious problem. Medicare doesn’t cover all expenses, healthcare inflation outpaces CPI, and retirees face longer lifespans than ever.
You can’t fix inflation later—your contract is often locked. You must plan ahead by choosing the right type of annuity and income structure today.
Why Comparing Options Matters
Insurance carriers offer different riders, rates, and payout structures. Some focus on high first-year income; others prioritize inflation protection. Comparing annuities side by side ensures you’re not stuck with flat income that becomes worthless over time.
Final Thoughts
If you’re relying on a fixed annuity for income, it’s critical to recognize the limits of static payouts. You need a strategy that grows with you—or you risk falling behind every year.
Speak with The Annuity Expert to compare options and get free quotes. We’ll help you find an annuity or insurance policy that preserves your purchasing power without sacrificing security.
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