Why Most Annuities Aren’t Inflation-Adjusted (and Why That’s a Problem)
September 24, 2019 by David Blanchett
Retirement for many people could last 30 years or longer, and even a relatively mild 2% annual inflation could have a significant impact on purchasing power over time.
Yet the vast majority of annuities don’t include a cost-of-living adjustment (COLA) to help combat inflation. Rather, most have payouts that are constant over time (commonly referred to as nominal)–even though nominal payouts can result in a significant decline in purchasing power for a retiree.
There are two primary ways to consider inflation risk when it comes to annuities: explicitly or implicitly.
Explicitly considering inflation means to have the payments tied directly to inflation. This how Social Security retirement benefits work today, where benefits are tied to the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. An annuity that has payments directly linked to inflation ensures a retiree will always have some constant amount available to spend, in today’s dollars, throughout retirement. Annuities linked to inflation are still relatively rare, though, with only about 0.2% of annuities quoted in 2018 including the option.
Click HERE to read the full story via The Wall Street Journal.
