Retirees, Here's What to Consider When Buying an Annuity
Saving for retirement is daunting enough without inflation throwing retirees a curve ball. Inflation soared in 2021, rising 6.8% year-over-year in November, the highest since 1982, according to government data. "When prices are going up, there's less margin for error," says Wade Pfau, a professor of retirement income at The American College of Financial Services. "Where you might have had surplus in your budget before, now there isn't that room to absorb a less-than-ideal investment."
Annuities are often pegged as the ideal solution for someone worried about outliving savings, but even they can come up short. Retirees turn to annuities for an immediate or future stream of guaranteed income in exchange for a lump sum or periodic payments to an insurer. The money invested in an annuity grows tax-deferred, but the payments you receive are taxed as ordinary income.
Just because an income is guaranteed doesn't mean it's inflation proof. "The value of an annuity's income can still be eroded, and inflation protection through the annuity, which you pay more for, isn't always the best solution," Pfau says. Plus, fees, returns and other conditions vary widely depending on the company and the type of annuity. To sort through the sales pitches, you'll need to understand how to evaluate these products and pair them with annuity strategies to keep your retirement income ahead of rising prices.