Inflation & Annuity Payments

Written By : Alanna Ritchie
Financially Reviewed By : Juliette Fairley
This page features 8 Cited Research Articles
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Inflation in the U.S. is predicted to rise to 2.5 percent, according to Fiera Capital Global Financial Forecast. Inflation happens when prices increase but the value of the dollar falls, meaning that your long-term investments start to lose their worth.

The Effects of Inflation on Annuities

An annuity gives you the security of a guaranteed annual income, but there is no promise the money you receive 10 years from now will carry the same purchasing power as it did on the first day you invested, due to inflation.

Inflation is the increase in the value of materials, goods or services without a corresponding increase in the value of money. For example, a loaf of bread may have cost $2 last year. But now the same loaf of bread is $2.50. As a result of inflation, your $2 cannot purchase the same goods as before.

Inflation can drastically reduce the value of your annuity.

For example, an immediate annuity purchased in 2003 guaranteed you $1,000 a month for life. That was good enough to cover rent and utilities on your condominium. It might even have provided enough leftover funds for groceries. Fast forward 10 years: Inflation increased the cost of rent, utilities and groceries, but you’re still getting $1,000 a month from the annuity. You can cover the rent and utilities, but there is nothing left for groceries. Inflation wins, you lose.

Losing Buying Power

The U.S. inflation rate is based on the Consumer Price Index (CPI), a system of pricing consumers are charged for various products and services. The current inflation rate for the United States is 2.9 percent. The average annual inflation rate is the percentage change between two given years. For example, from 2003 to 2017, the cumulative inflation rate was 33.66 percent.

A product that cost $100 in 2003 had a $134 price tag in 2017 because of inflation.

If you stretch that period out to 20 years — a reasonable goal for someone who retires at age 65 — you can see how inflation can take a chunk out of an annuity.

Protecting Assets from Inflation

You can prevent your assets from losing value over time by investing in inflation-adjusted annuities or an inflation rider. Both options help to protect your investment from losing value over time by adjusting your payout each year based on inflation. For inflation-adjusted annuities, this benefit is built-in. Others can purchase an inflation rider as an add-on.

Turn future payments into cash you can use right now

You can also avoid losing annuity value by building your portfolio through diversifying and considering stock and security options to account for long-term needs.

Inflation-Adjusted Annuities

Annuity issuers offer special annuities with long-term advantages. Inflation-adjusted annuities are based on a fixed percentage or a variable increase. The variable increase, for example, might be tied to the Consumer Price Index or might increase by 3 or 4 percent each year. These increases do incur a cost to you, which are taken out of the monthly payouts received the first several years.

If a 65-year-old man purchased a $100,000 annuity with inflation-adjusted protection, it would yield $167 less a month the first year than without protection. The monthly payouts would break even after approximately 15 years. Depending on your age when purchasing an annuity and accepting payments, this method might pay off for you.

Investing Elsewhere

Pre-retirees can purchase Treasury Inflation-Protected Securities (TIPS), bonds issued by the government to hedge against inflation risk. These are also tied to the Consumer Price Index. A portion of the value increases with inflation, while part of it stays fixed over time.

Another strategy for preventing losses focuses on making sure to diversify your portfolio.

Including conservative, stable investments along with higher-risk stocks is a strategic way to grow while minimizing losses.

Some financial experts recommend relying on home equity or purchasing gold as safeguards against inflation. Evaluating where the market is at the time of purchase as well as projections for the future can help show how risky these investments may be.

8 Cited Research Articles

  1. Fiera Capital Corporation. (2018, June 6). Fiera Capital Global Financial Forecast 2018-2025: Inflation fears and rising rates pave way for recession. Retrieved from https://www.prnewswire.com/news-releases/fiera-capital-global-financial-forecast-2018-2025-inflation-fears-and-rising-rates-pave-way-for-recession-300660476.html
  2. Fiera Capital Corporation. (n.d.). Global Financial Forecast 2018–2025. Retrieved from https://www.fieracapital.com/sites/default/files/Global%20Financial%20Forecast%202018-2025%20ENGLISH%20WEB.pdf
  3. Coin News. (n.d.). Current US Inflation Rates: 2008-2018. Retrieved from https://www.usinflationcalculator.com/inflation/current-inflation-rates/
  4. Blueprint Income. (2018 August). August 2018 Rates. Retrieved from https://annuities.blueprintincome.com/learn/guide/current-rates/
  5. Bureau of Labor Statistics. (n.d.). CPI inflation calculator. Retrieved from https://www.bls.gov/data/inflation_calculator.htm
  6. Marotta, D. J. (2012, August 27). The false promises of annuities and annuity calculators. Retrieved from https://www.forbes.com/sites/davidmarotta/2012/08/27/the-false-promises-of-annuities-and-annuity-calculators/#73cdf190529d
  7. US Inflation Calculator. (2008, July 23). Current US inflation rates: 2006-2017. Retrieved from http://www.usinflationcalculator.com/inflation/current-inflation-rates/
  8. USA Today. (2012, October 18). Should you get an inflation-adjusted annuity? Retrieved from https://www.usatoday.com/story/money/columnist/waggoner/2012/10/18/waggoner-inflation-adjusted-annuity/1639119/
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