Episode 51: Are Inflation Adjusted Annuities Worth The Cost?

Inflation is something we all feel, whether it’s at the gas pump, the grocery store, or buying a car. Inflation-adjusted annuities aim to address this by increasing your income over time. But does it make sense to choose this option?

Inflation-adjusted annuities offer a steady income that grows each year to help keep up with rising costs. While that sounds great, the decision isn’t always straightforward. For many, the question comes down to whether the higher starting income of a traditional level income annuity is better than the growing income of an inflation-adjusted annuity.

Should You Choose a Higher Starting Income or Inflation Protection?

When choosing an annuity, the first big decision is whether to go for the highest possible starting income or an annuity with inflation protection. To illustrate this, here’s an example:

• • A 65-year-old couple funding $100,000 into a traditional annuity could receive about $7,100 a year in income.

• • The same couple putting $100,000 into an inflation-adjusted annuity (with a 3% annual increase) would start with about $4,750 a year.

This means you’d get over 50% more income immediately with the traditional annuity. That’s a big difference, especially for retirees who need money sooner rather than later.

Comparing Immediate Income Levels: Level vs. Inflation Adjusted Annuities

Here’s a simple breakdown of how the income levels compare for both options:

At first, the traditional annuity provides significantly more income. But over time, the inflation-adjusted annuity catches up and eventually surpasses it.

Understanding the Break-Even Point: When Does an Inflation-Adjusted Annuity Pay Off?

The break-even point is when the total income from an inflation-adjusted annuity equals the income from a traditional annuity.

• • Income Gap at Year 15: After 15 years, a traditional annuity would have provided $19,000 more in total income than the inflation-adjusted option.

• • Catch-Up Point: It would take another 11 years (around Year 26) for the inflation-adjusted annuity to close this gap.

By the time the inflation-adjusted annuity catches up, you’d be in your late 80s or early 90s. For some, this delay may not make sense, depending on their retirement goals.

The Bigger Picture: Addressing Inflation Concerns in Retirement

While inflation is a valid concern, it’s important to look at the bigger picture. The best hedge against inflation isn’t always an annuity—it’s often other assets like stocks.

However, annuities serve a different purpose. They’re designed to provide stability and guaranteed income, which can be especially valuable in retirement. Whether you choose an inflation-adjusted option or not, the key is finding a strategy that fits your goals.

Making the Right Choice for Your Retirement Plan

Choosing the right annuity isn’t about picking the “best” product on the market. It’s about finding what works best for you. Here’s what to consider:

• • Your Immediate Income Needs: Do you need more income now or later?

• • Your Inflation Concerns: Are you comfortable with fixed income, or do you want income that grows?

• • Your Overall Plan: How do annuities fit with your other retirement assets?

At the end of the day, it’s all about balancing your current needs with your long-term goals.

In the podcast episode, I go a bit deeper into the examples and explain my approach to identifying whether or not an inflation-adjusted annuity would be appropriate.

If you’ve been shown an inflation-adjusted annuity and want a second opinion on whether it’s the best solution for your specific situation, schedule a call with me and we’ll take a look at it.

All The Best,

Marty Becker

Podcast Episode 51: Are Inflation-Adjusted Annuities Worth The Cost?

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