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Annuities are a popular insurance contract that provides guaranteed returns for a set period or for a lifetime. In this article, financial experts discuss whether or not annuities represent a good investment for inflation protection.

Carefully Evaluate Any Annuity And Pay Special Attention To The Inflation Riders And How It is Calculated

“Single-Premium Annuities are not designed to be inflation protection, they are insurance product designed so that you don’t run out of money. Annuities are simply a promise to pay you and income for the rest of your life how long or short that may be. Annuity companies usually offer the opportunity to purchase or not purchase an inflation rider when you purchase one of these contracts. An annuity is not really an investment to protect against inflation because your actual return, that is how many and long you receive payments- is primarily delivered by how long you live!

An inflation rider might be purchased and in this case, inflation might outpace the contract terms and your payment would be adjusted upwards to keep up with the rising costs of goods and you would see your real income keep up with the rising costs. Inflation may be similar to historical averages and your income would be similar throughout the term of the contract.

Currently, we are at near-historic low rates of in inflation and if an example consumer purchased an SPIA and then saw a run-up in inflation, the real income of the annuitant could be significantly reduced. Inflation may be very low and you may have paid a premium for inflation protection, but if the inflation rate was very low you may have been better off not purchasing the option.

This only covers single-premium annuities, there are also period certain annuities, return of premium annuities and many more. The main point is to carefully evaluate any annuity and pay special attention to the inflation riders and how it is calculated, as well as understand the pros and cons of
the contract you are evaluating.”

Jason B. Ball, CFP®, ChFC®, CLU®, Ball Comprehensive Planning, LLC

When Setup Properly Annuities Can Provide A Lifetime Income Stream

“I am an independent insurance broker specializing in annuities – and yes – I believe annuities are a good investment.

When setup properly, annuities can provide a lifetime income stream for individuals and couples. That income stream can also increase each year based on moves in the CPI index. And once the income stream increases, it can’t go back down.

A guaranteed lifetime income annuity that increases payments based on moves in the CPI (or other inflation indexes) can be a valuable piece to any retirement plan. It acts as a pension plan and can reduce the financial strain that comes along with the overall market volatility we’ve experienced the last decade and a half.”

Adam M. Hyers, President, Hyers and Associates, Inc.

Annuities Are A Great Way To Make Sure Your Money Grows

“Annuities are a great way to make sure your money grows at a rate that outpaces inflation. Annuities are also often guaranteed not to go down when the market goes down. This means they are protecting you against losing everything in a crash as well, making them ideal for people who need to have a certain amount of money each month to live on when they are no longer working.”

Stacy Caprio, Financial Blogger, Fiscal Nerd 

They Come With Several Costly Caveats That Do Not Make Them Worthwhile For Most Investors

“Annuities are not a great buffer against inflation. They provide guaranteed returns, but they come with several costly caveats that do not make them worthwhile for most investors.

Annuities typically have several fees (including administrative or death benefit costs) associated with them above the cost of investment fund management fees. Inflation-protected annuities have additional fees for this benefit as well.

Annuities payments are not guaranteed. If the insurance company an investor purchased from goes bankrupt, it is possible that the individual might lose their payments.

If the investor decides they no longer want to the annuity, there is usually a penalty fee to cancel it and withdraw the money.

In general, a better strategy would be to invest in low-fee options that return healthy dividends. Over time the stock market historically outperforms what an annuity can offer, so investors with many years to go will do much better putting their available funds into 401K and IRA options than to purchase annuities now.”

Isaiah Goodman, Becoming Financial

Good Investment For Inflation Protection But Should Not Be Used As Pure Inflation Protection Vehicles

“Annuities can be a good investment for inflation protection but should not be used as pure inflation protection vehicles. They should only be used as inflation protection vehicle if the investor has an additional concern such as running out of money too quickly, having a stable income for peace of mind, or having some form of downside protection. Most annuities offer a cost of living adjustment rider which allows the income to scale based on one of the economic inflation metrics. However, annuities are primarily insurance for running out of money too fast. The way this happens is that you either live too long, you can’t budget to save your life, or you panic every time the market gets volatile.

If you don’t think you experience one of these core problems than there are a variety of better investments, you can make to protect your self from inflation concerns. If you are conservative in nature you can buy Treasury Inflated Protection Securities. Not only are they guaranteed by the federal government, but they are very stable investment. Their payments adjust directly based on inflation, so it is a direct hedge for inflation. However, if you want the best inflation-adjusted investments then look no further than the stock market. Equities are the best available investment when it comes to inflation. The cost of your day to day goods will directly be represented in the cost of goods these companies sell.”

Alex Caswell, CFA CFP, Wealth Planner, RHS Financial

Annuities Are A Very Misunderstood Product

“Annuities are a very misunderstood product. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. There are different types of annuities that can play a beneficial part in anyone’s holistic strategy. As an industry professional, I believe that annuities serve a purpose for anyone, and can’t fall into a lump-sum of good or bad.”

Danita M. Harris, Managing Member, Guice Wealth Management

Fixed And Indexed Annuities Will Almost Certainly Beat Inflation With No Risk Of Loss

“Most long-term instruments will likely beat inflation, and therefore are good for inflation protection; however, most individuals who are looking for inflation protection are also just as concerned with the safety of principal and long-term liquidity. Fixed and indexed annuities will almost certainly beat inflation with no risk of loss, offering significantly higher interest rates than most fixed instruments. Additionally, annuities are tax-deferred, resulting in an even higher effective rate of interest. Once the surrender period has expired (usually between about five and ten years), most annuities are completely liquid provided the account owner is age 59.5 or older, unless of course, the account is annuitized (set to pay out a guaranteed income stream, usually for life or beyond).”

Rob Drury, Executive Director, Association of Christian Financial Advisors

It Depends What Type Of Annuity You Choose To Invest In

“I think it depends on what type of annuity you choose to invest in. Inflation can be unpredictable, and since annuities tend to be long-term investments, they may not be the best way to protect your finances from inflation. Even in a fixed annuity, you would guarantee the same amount of capital in return, but inflation could potentially negate any capital gains from this type of investment.

However, you could take out an immediate annuity that would start paying out in the short-term, making it a very viable option. This way you could start receiving your investment in small parts over the course of time, which is better than receiving a lump sum in the distant future. Smaller short-term capital gains will help you hedge against rising inflation, and you can always halt your annuity in the event inflation rises unexpectedly in the future.”

Igor Mitic, Co-Founder, Fortunly.com

It Is Generally Not The Top Of Mind Reason One Would Purchase An Annuity

“Annuities CAN have a place in someone’s overall financial planning for part of someone’s overall assets. Inflation protection could be a component of the reason why one would purchase an annuity, although the more common reasons found involve potential guarantees of income for life and the death benefit…always for additional fees. There are step-up features whereby the income benefit base steps up each year, or where the death benefit base steps up annually…or both. The increasing income base can mitigate the effects of inflation, depending on the specifics of the particular feature. There is not a one-size-fits-all, in that annuities can be tied to the stock market [variable annuity], a fixed rate of return [fixed annuity], or tied to an index [indexed annuity]. The fees can vary depending on the insurance carrier and the ancillary benefits purchased. The distribution options can vary as well, depending on the income need. All of that said, while inflation protection can be a component of the features of an annuity, it is generally not the top of mind reason one would purchase an annuity.”

Jimmy Masters, AIF(r), CRPS(r), Vice President – Investments, The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors

Although annuities provide guaranteed payments to investors, there is no overall consensus as to whether or not they provide good inflation protection. If you are thinking about investing in annuities, take into account what the financial experts have discussed in this article, and always do your due diligence.

Sarah Bauder

Editor at CPI Inflation Calculator
Sarah has been writing on the topics of politics, history and finance for over a decade. She is currently an editor at CPI Inflation Calculator, covering the topics of CPI, inflation, US economy and economic commentary.
Sarah Bauder