Money Matters

Creating Your Own Pension

Inflation reduces the value of future monthly payments. Insurers have responded by offering lifetime annuities with inflation protection that provide a stream of increasing payments.

Inflation-protected annuities guarantee a growing income based on an annual cost-of-living adjustment (such as 3.00% or 2.50%) chosen when you buy the annuity. If you choose a COLA that’s near the historical average, annual income increases will outpace inflation some years, and in other years they’ll fall short. Thus, you’ll probably keep up with inflation in the long term.

You do pay a significant price to get automatic “pay raises” annually. Using the same example, above, but choosing an annuity with a 3.0 percent COLA, your monthly income would be $792.47 to start. It wouldn’t exceed the monthly payment from the plain annuity until you reach 76.

Even at 85, you would have collected slightly less in total than you would have with the plain annuity. You will, however, be collecting $1,431.29 monthly at that point.

If you choose a lower increase, such as a 2.5 percent COLA, the differential will be lower at the start.

For the most part, I prefer standard level-pay immediate annuities. But a COLA-adjusted annuity can be a wise purchase if you’re fairly sure of a long life expectancy. And you can put some money in an inflation-protected annuity and some in a standard immediate annuity.”

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at