We’re often asked what an annuity guaranteed lifetime withdrawal benefit is. Simply put it’s a rider that is attached to either a variable annuity or an equity-indexed annuity that allows you to receive an annual withdrawal throughout your lifetime. It’s called a living benefit as the withdrawals can occur for the rest of your life even if the annuity’s account value decreases or is exhausted. But there are some caveats. Annuity guarantees, including guarantees associated with benefit riders, such as the guaranteed lifetime withdrawal benefit, are subject to the claims-paying ability of the annuity issuer. And withdrawals made prior to age 59 ½ may be subject to a 10 percent federal penalty tax.
What affect does inflation have on these annuities? Are they protected against inflation?
No, they’re not. Fixed annuities do not protect against inflation. Fixed annuities provide a fixed rate of return on the individual’s investment and do not adjust the income payments based on changes in the cost of living. What this means to you is that the purchasing power of the individual’s retirement income may be reduced over time as inflation increases. As recent years have taught us, the rate of inflation is not consistent; it can skyrocket! If this is a concern and you are worried about protection against inflation, you should look into an inflation-protected annuity.
Another valid question is whether or not annuity payments increase with inflation. That depends totally on the type of annuity you have. Some annuities, such as inflation-protected annuities, are specifically designed to increase income payments over time to keep up with inflation. The income payments of these annuities are linked to a benchmark, such as the Consumer Price Index (CPI), which measures the change in the cost of living over time. As the cost-of-living increases, the individual’s income from the annuity increases also.
What about variable annuities?
Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk, including the possibility of loss of principal. They generally contain fees and charges which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees and charges for optional benefits and riders. Since variable annuities are sold by prospectus, you’ll need to consider the investment objectives, risk, charges and expenses before investing.
As you can see, annuities come in all shapes and sizes with their own set of caveats including the effect inflation has on them. You need to sit down with your wealth management advisor to discuss all the options open to you and which would best suit your financial goals.
Sources: Broadridge Investment Management Solutions, Annuity.org (July 12, 2023 post)
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