Which Annuities Help with Inflation?


With inflation on the rise, many people in retirement are concerned about maintaining their lifestyle. How can they keep up with the rising cost of living while making sure they don’t run out of money? One option that can help with inflation is with an annuity.

Inflation can be a major problem for retirees, as the cost of living goes up while their income stays the same. Annuities can help protect against inflation by providing a set, unchanging, minimum income that can give you more flexibility with the rest of your money to counter changes in the cost of living. Some annuities also have benefits that pay increasing income over time.

In this article, we take a look at how annuities can help offset the effects of inflation, which specific types of annuities might be worth exploring for this, and how to choose the right annuity for your needs.

How Can Annuities Help Offset Inflation?

There are several different types of annuities, but one of the main ways they can help offset inflation is by providing a guaranteed source of income. That said, the actual payout amount might differ depending on what type of annuity you have in your retirement portfolio, which we will discuss in greater detail.

Annuities can be especially helpful in retirement, when you may be on a fixed income from Social Security or pensions. An annuity can help ensure that your income keeps relative pace with inflation, so you can maintain your standard of living.

Inflation can have a major impact on your retirement income. Over time, the purchasing power of your savings can decline, making it difficult to cover basic expenses. One way to help guard against inflation is with annuities.

Annuities are a financial vehicle that can provide a guaranteed, steady income in retirement. There are a number of ways that annuities can offset inflation and its impact on your retirement income, offering protection from market volatility, which can help preserve the value of your savings. With careful planning, annuities can be an effective tool for offsetting the impact of inflation on your retirement income.

What Sort of Options Are Available for Inflation Protection?

Annuities today provide a wide range of options for receiving income. You can choose between getting paid at fixed levels, or with an “increasing rate” that is tied to inflation benchmarks or some other index – such as an underlying index linked to the annuity.

When it comes to safeguarding against inflation during retirement, a set, level annuity payout can be a great option. The annuity provides payments that remain constant, regardless of the overall level of inflation.

This can provide retirees with much-needed stability and predictability while allowing them to allocate financial resources to other investment vehicles. That also gives retirees more flexibility and ability to take on more risk with their other money so that their overall retirement assets can keep up with inflation.

Inflation-adjusted annuities are another safeguard against inflation during retirement. This option is designed to increase payouts relative to overall cost-of-living increases, making them a valuable tool for anyone looking to protect their income from rising prices.

However, it’s important to note that these annuities come with a trade-off: the insurance carrier takes on the risk of inflation itself. This is reflected in the payout amounts you receive, which are usually smaller in early years than those from a similar, non-inflation-adjusting fixed annuity.

It might take a few years before your annuity payment catches up to that of a similar, non-inflation-adjusting fixed return. But over time, those payouts can provide a valuable guard against inflation’s effects on your retirement savings.

What Annuity Types Help with Inflation?

While any type of annuity can potentially help offset the effects of inflation to some extent, there are certain types that are better suited for this purpose.

Fixed-type annuities offer a guaranteed interest rate for the life of the annuity and are protected against changes in the market. While fixed annuities are often used more for growth, some contracts do have competitive payouts.

If you do have a fixed-type annuity, your payments won’t decrease if market interest rates decline. However, depending on rates, a fixed annuity may not be able to keep up with rising inflation rates.

A fixed index annuity is a type of annuity that provides options for a level income, increasing income, or inflation-adjusting income. A variety of fixed index annuities have an add-on benefit, called an income rider, that can help drive these options.

The level income rider guarantees that the recipient’s income will stay the same each year, regardless of what happens to the stock market. The increasing income rider provides the opportunity for the recipient’s income to grow each year. However, the actual increase (and whether there is an increase) can vary depending on how the fixed index annuity’s underlying financial benchmarks do.

The inflation-adjusting income rider ensures that the recipient’s income will keep up with inflation, as measured by a certain index (such as the consumer price index).

Variable annuities are another annuity type to help with inflation during retirement. Like fixed index annuities, variable annuities have a variety of riders that can pay a level or increasing income.

The difference is that you can lose money in a variable annuity, as your money is invested directly in market funds. Even so, this type of annuity can help retirees keep up with the cost of living and ensure that they have enough money to cover their expenses.

Depending on your financial situation in retirement, annuities can be a great way to offset the effects of inflation. It’s important to consult with a financial advisor before making any decisions. They can help you understand how different annuities work, as well as which one may be right for your individual needs and goals.

What Are the Limits of Annuities with Keeping Up with Inflation?

While annuities can help to offset the effects of inflation, they aren’t without their limitations.

In general, annuities won’t keep up with the effects of extreme inflation. For example, we saw inflation of 7% in 2021. If this trend were to continue, many annuities on the market, by themselves, wouldn’t be able to keep pace at that rate.

In addition, while some annuities offer increasing income options, some are only available for a set period of time. After that, your payments will be capped and remain level. Either way, you may need to supplement your income from other sources if you want to keep up with extreme inflation.

When it comes to more moderate levels of inflation, however, annuities can be even more of a great way to help offset the effects. While they may not be able to keep up with the rate of inflation dollar-for-dollar, they can help maintain your purchasing power and provide a steady stream of income in combination with other retirement savings in more aggressive allocations.

The Bottom-Line on Annuities and Inflation

Annuities can be a great way to help offset the effects of inflation in retirement. There are a variety of annuities, each with its own benefits and limitations.

A financial advisor or independent retirement specialist can explain your options. They can offer guidance on which annuities make the most sense for you, and how to use them in combination with other retirement options. They can also help create a comprehensive retirement strategy that protects you from the effects of inflation and other potential “worst-case” scenarios so that you can spend your days enjoying your retirement to the fullest.

Are you looking for a financial professional to help you plan for a financially comfortable, fulfilling retirement? Whether you are starting on your retirement income plan or want another opinion of your current retirement strategy, many independent financial professionals are available at SafeMoney.com to assist you.

Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly and discuss your situation. If you would like a personalized discussion, please feel to request an initial appointment to ask questions and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

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