How Inflation-Adjusted Annuities Work

Inflation-Adjusted Annuities: What They Are and What They’re Not

When it comes to annuity sales pitches, there’s one rule you need to remember: If it sounds too good to be true, it is—every single time. No exceptions.

Annuities are contracts. They’re not dreams. They’re not wishful thinking. And while I get a lot of calls about inflation-adjusted annuities (because inflation is the gorilla in the room), the honest truth is this: no annuity product perfectly solves for inflation. Period.

The Sales Pitch vs. Reality

You may have heard about “the perfect inflation annuity” at your local steak dinner seminar or from a commissioned agent. They’ll pitch it like it’s the golden goose. But the reality is this—if such a product truly existed, I’d already be talking about it. I represent all carriers. I see everything. It’s just not out there.

So, instead of chasing unicorns, let’s talk about what actually exists in the marketplace today and what you need to know to make a smart, informed decision.

Understanding Inflation

Inflation is a common fear tactic used in financial media. “It’s coming! You better prepare!” But here’s the thing—no product can perfectly track inflation, because no one knows exactly what inflation will do.

People have been predicting runaway inflation for years. Some were right, some weren’t. Interest rates are just as unpredictable. And yet, people still want to know how annuities might help. The good news is that there are options that can offer contractual increases. But they come with tradeoffs—every time.

What You Already Own: Social Security

Before we dig into the details, let me remind you of this:

You already own the best inflation annuity on the planet. It’s called Social Security.

Social Security increases your payments based on political decisions—whether you agree with them or not. Annuity companies? They don’t just raise your payments because they feel like it. They’re not the government. They don’t print money. They price everything in.

No annuity company CEO wakes up thinking, “I want to give away money today just because I love Americans.” They have shareholders. They have actuaries. They price the risk—and they don’t give anything away.

Annuitized Products with COLA Riders

Now, let’s discuss the legitimate ways annuities can offer some inflation protection.

Three annuitized products allow you to attach a COLA (Cost of Living Adjustment) rider at the time of application:

• Single Premium Immediate Annuities (SPIAs)
• Deferred Income Annuities (DIAs)
• Qualified Longevity Annuity Contracts (QLACs)

When you apply, you can choose to increase your income by a fixed percentage every year—typically 1%, 3%, or 5%. Sounds great, right?

But here’s the catch: the more generous the COLA, the lower your initial payout. There’s no magic. It’s all priced in. And that’s where people get surprised.

Typically, it takes six to nine years before your COLA-adjusted income “catches up” to the amount you would’ve received with a higher static payment. Therefore, it’s essential to consider your longevity and your specific income objectives.

One strategy I often recommend: split your annuity purchase. Put half into a COLA product and half into a static income product. That way, you hedge both sides.

CPIU Increases Are Gone

There used to be another option: CPIU (Consumer Price Index for Urban Consumers) increases, where annuity payments would track an inflation index. But those have largely disappeared. A few carriers offered them in the past, but most have removed them due to complexity and lack of guarantees.

So, in today’s marketplace, COLA riders are your only real inflation-adjustment option — and even those must be weighed carefully.

What About Indexed Annuities?

Now let’s talk about Fixed Indexed Annuities, another product often pitched as “inflation-adjusted” because of potential market upside.

These were first introduced in 1995 as alternatives to CDs—products that might slightly outperform bank CDs. That’s still how I view them. But unfortunately, the sales pitch has evolved to something more exaggerated: “Market upside with no downside.”

That’s misleading. Indexed Annuities are not securities. They’re fixed insurance products, regulated at the state level, not by the SEC.

Some of these Indexed Annuities come with Income Riders that claim to increase income based on the index’s performance. But again, those increases are not guaranteed. And just like COLA riders, annuity companies lower the initial payout to compensate for any potential future bump.

So, if you hear that pitch at the next Bad Chicken Dinner Seminar, elbow your spouse and remember: they’re not giving anything away. It may be a suitable product for your situation, but it’s not a magic solution.

The Bottom Line: Be Informed

There’s no perfect annuity product that solves for inflation. All of them come with tradeoffs.

If you want real inflation planning, one smart option is to:

• Buy income when you need it, and
• Reverse-engineer the quote based on your income gap at that time.

Don’t fall for the dream. Focus on the math.

Let’s Build Your Plan—The Right Way

Go to The Annuity Man. Use our calculators, run your own quotes, or schedule a call, and we’ll do it for you. You can even download my free books or listen to our podcast.

I’m not here to hype anything. I’m here to educate you—wholly and truthfully. Whether it’s a COLA rider, an Income Rider, or a simple SPIA, every annuity has benefits and limitations. You deserve to know both.

Thanks for reading—and I’ll see you on the next Stan The Annuity Man blog.