Most annuity income is a fixed dollar amount for life. The cheque does not change, which is the point — and also the problem, because what it buys falls every year. Over a retirement of twenty or thirty years that erosion is not a detail. You have three ways to deal with it: buy an increasing payment, cover only the expenses that do not inflate much, or keep other money working to fill the gap later.
What level income actually does over time
A payment that never changes loses purchasing power at whatever rate prices rise. The arithmetic is unforgiving in the second half of a long retirement, which is exactly when people have the least flexibility to earn more or cut back.
This is not an argument against guaranteed income. It is an argument for knowing which of your expenses the income is meant to cover, and whether those expenses inflate.
Option one: buy an increasing payment
Many income annuities offer a payment that rises each year — commonly a fixed percentage, sometimes linked to a published index. The trade is simple and it is severe: the first payment is materially lower than the level payment on the same deposit. You are not being given anything; you are rearranging the same money across time.
That creates a crossover point — the year in which the rising payment catches up with the level one, and a later year in which the total received catches up. Ask for both figures before choosing:
- What is the monthly payment, level, on this deposit?
- What is the monthly payment with the increase, and at what rate does it rise?
- In which year do the two monthly payments cross?
- In which year does the cumulative total cross?
If the crossover sits beyond a realistic horizon, the increasing option is worse for you even though it sounds safer. If it sits in your early seventies, it may be the better contract. The question is arithmetic, not philosophy, and any insurer can produce both quotes on the same day. Our article on how much income an annuity pays explains the other inputs that move the number.
Option two: cover the expenses that do not inflate much
Guaranteed income does not have to cover everything. A common approach is to match level annuity income against the expenses that are already fixed or slow-moving — a mortgage payment that never changes, insurance premiums, a car payment — while leaving faster-inflating costs to money that can grow.
Health care and long-term care are the two that historically rise fastest, and they are also the two most likely to arrive late in retirement. If a level payment is funding those, the plan has a weak point built into it. Our long-term care cost calculator shows what Florida care costs today and in the year care is likely to begin, which is the honest way to see the problem.
Option three: stagger the purchases
Rather than converting everything at once, some people buy income in stages — a portion now, more in five years, more again later. Each purchase is priced at the interest rates and the age of the day, and a later purchase at an older age generally buys more income per dollar. It is not inflation protection in the contractual sense, but it spreads the timing risk and keeps money available in the meantime.
The cost is complexity, and the risk is that the later purchases never happen.
The one inflation-linked income most people already have
Social Security benefits are adjusted annually. The Social Security Administration applies a cost-of-living adjustment based on the Consumer Price Index for Urban Wage Earners and Clerical Workers published by the Bureau of Labor Statistics, and benefits rise when that index rises.
That matters for two reasons. It means part of your income is already inflation-linked, so the annuity may not need to be. And it means delaying Social Security increases an inflation-adjusted benefit for life — which, for many households, is the cheapest inflation protection available before any product is bought. Our retirement income gap calculator starts from what you already have guaranteed, which is the right place to start.
What to ask before you decide
- What is the level payment and the increasing payment, on the same deposit, quoted on the same day?
- At what rate does the increasing option rise, and is that rate fixed or linked to an index?
- What are the two crossover years — monthly, and cumulative?
- Which of my expenses is this income covering, and do those expenses inflate?
- What does delaying Social Security do to my guaranteed inflation-linked income?
Next step
Bring the expenses first and the product second. Which option fits depends on your situation — talk it through with a licensed agent before deciding.
Sources
- Social Security Administration — annual cost-of-living adjustments, and their basis in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
- U.S. Bureau of Labor Statistics — the CPI-W index used for that adjustment.
- NAIC, Buyer’s Guide for Deferred Annuities — payout options, including increasing payment options, and what each costs in starting income.
- Section 627.4554, Florida Statutes (2023) — best-interest standard for annuity recommendations.
Lifeworth Insurance Agency is a trade name of Lifeworth Financial Group LLC, licensed in Florida, National Producer Number 21228343. This article is general information, not tax, legal or investment advice. Annuities are insurance contracts, not bank deposits; they are not FDIC insured and all guarantees are backed by the claims-paying ability of the issuing insurer. Payment options and increase rates vary by insurer and contract.
Ready for figures? Request an annuity quote — six questions, then a written comparison from more than one insurer.
Related reading
- How Much Income Will an Annuity Pay?
- When to Buy an Annuity: Age, Timing and Key Factors
- Why Annuities Are Bad: Real Reasons People Hate Them
This article is part of the annuities overview.