If you own an annuity – or you plan to own one in the future – you can count on a regular stream of income that will continue for a pre-set period of time, or even for the remainder of your lifetime. That’s the good news. But because retirement could last for many years, will your income increase over time to keep pace with inflation?
It could if you add an annuity inflation rider. Going this route can raise your payments over time so that you don’t have to drastically change your lifestyle in the future. But as with most anything else, there is a “tradeoff” to having this feature. So, before you make a long-term commitment to an annuity with inflation protection, it’s important to understand the advantages, along with the potential drawbacks.
What are Annuity Inflation Riders and How Do They Work?
Annuity inflation riders adjust the amount of annuity income payments that you receive each year. Many insurance companies allow you to either add this rider at the time you initially purchase the annuity, or you can put it in place at a later date.
There are oftentimes a couple of options available for how the income increase is determined, too. For instance, a level percentage will increase the payments – usually on a yearly basis – by a certain pre-set percentage. Today, many annuity cost of living adjustments range between 1% and 6%.
Further, you may be allowed to choose either a simple or compound calculation. In this case, the simple basis will raise the income payment by a certain percentage each year, regardless of what inflation does in the economy. So, for example, if you choose a 4% cost of living adjustment, your payments will go up by 4% every year.
With the compound calculation, the annual percentage income increase is based on the most recent year’s value. This alternative will typically provide you with a larger increase than the simple version.
Alternatively, you could base the increase in payment by annual increases in the Consumer Price Index (CPI). Therefore, in years when there is high inflation, the annuity payments will go up more than they will during times of low inflation.
Items to Consider Before Adding an Annuity Inflation Rider
While getting a “raise” each year on your retirement income might sound nice, it is important to understand what the tradeoffs are in order to obtain an annuity income increase. One of the biggest factors is the cost of the annuity inflation rider.
This refers to the lower amount of income that the annuity pays out as compared to what the payment would be without the inflation rider added. For example, if there is no inflation rider associated with the annuity, your income payments may start – and continue – at $1,000 per month. But the same annuity with a cost of living rider may start your payments out at only $800 per month, even though they will rise over time.
Pros and Cons of Annuity Inflation Riders
|Annuity Inflation Rider Benefits||Annuity Inflation Rider Drawbacks
|Increased income over time||Possible additional premium cost
|Helps to combat inflation and rising prices ||Lower initial payments from the annuity
|Usually several options to choose from when determining how the income will go up||Typically unable to change the way the increase is calculated once it is in place
Does Your Retirement Plan Have Guaranteed Income that Rises with Inflation?
Inflation can be a key factor in the creation of a retirement plan. This is particularly the case given that people are living longer now and need to raise their income regularly in order to maintain a certain lifestyle.
If your retirement plan doesn’t have a reliable and ongoing source of income in place, we can teach you about options that are available to you. At Annuity Gator, our mission is to help people understand how retirement income works, and how it can alleviate the concern about running out of money in the future.
So, if you would like to learn more, feel free to contact us at (888) 440-2468
, or send us an email by going to our secure online form
. We look forward to hearing from you.