A guaranteed lifetime annuity can maximize a retiree’s annual income and provide an income that cannot be outlived, as discussed in our paper titled "The (Mostly) Pros and (Few) Cons of Lifetime Payout Annuities." However, fixed-rate annuities do not protect a retiree’s income from purchasing power losses because of inflation (e.g. as measured by changes in the CPI). The purpose of this paper is to describe types of annuities and other strategies that will offer the possibility of growing payments during retirement.
Inflation, like longevity, is a major risk factor for retirees. If we factor in 20 or 30 years of inflation, the purchasing power of a fixed monthly annuity payment will gradually diminish in relation to the cost of a retiree’s expenses. This is not an argument against insuring against longevity, but inflation is a concern that advisors should address explicitly and procedurally.
