Keep Pace With Inflation in your Life Annuity

For millions of Americans, a life annuity can provide safety of principal and tax deferral. However, one disadvantage inherent in most life annuities is their inability to keep up with inflation over the long-term. For example, assume that you invest $100,000 into a single premium immediate life annuity. as an example, a current contract from a major annuity company would then pay out $658.59 per month, for a total of $7,903.08 for the year.  The problem is if the rate of inflation is 3%, then the purchasing power of these payments will decline from one year to the next. Obviously, $7,903 will not buy in a future year what it can now. Imagine how you feel twenty years from now when the purchasing power of your life annuity is reduced by 47%! One way that life annuity buyers can deal with this problem is to purchase a cost-of-living rider in the contract. This rider is designed to ensure that the income from the annuity stays abreast of the rate of inflation over time. However, these will be a trade off in that less income may be received today. For example, the same immediate life annuity contract with a 3% inflation [...]

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