It’s a common objection when people consider lifetime income annuities as part of their retirement strategy:

"I’ve heard annuity income stays level for my whole lifetime, so how does that help me fight inflation?"
 

On the surface, this seems like a reasonable concern—after all, inflation can erode the value of fixed payments over time. But here's the truth: the income from a lifetime income annuity can be far higher than any conventional retirement income method from day one. And it’s this immediate income advantage that can make inflation less of a concern in the early years of retirement.

 

The Mathematical Advantage: Annuities vs. Conventional Methods
 

Let’s break it down using a basic case study example.

Let's take a 65 year old retiree who has a $500,000 sum of principal they want to use to generate retirement income with in today’s retirement landscape.  

At the time of this writing, a $500,000 lifetime annuity for a 65 year old, using a reputable A-rated insurance company, would produce an immediate, guaranteed lifetime annuity payout of $35,700 per year - that would never be exposed to downside market risk or sequence of return risk.  

Now, in contrast, here’s how the income generated from that same $500,000 compares across different conventional income methods, such as living off interest-only or the 4% market withdrawal rule:

 

• At a 3.5% Interest Rate (Bonds, CDs, MYGAs, Dividends):
  
  Income Generated = $17,500 per year
  
  Lifetime Income Annuity Advantage = $35,700 - $17,500 = $18,200
  
  Dollar Difference = $18,200 more annual income from the annuity
  
  Percentage Difference = 104% higher annual income from the annuity
  
   

• At a 4.0% Interest/Withdrawal Rate (4% Withdrawal Rule):
  
  Income Generated = $20,000 per year
  
  Lifetime Income Annuity Advantage = $35,700 - $20,000 = $15,700
  
  Dollar Difference = $15,700 more annual income from the annuity
  
  Percentage Difference = 78.5% higher annual income from the annuity
  
   

• At a 4.5% Interest/Withdrawal Rate (Bonds, CDs, MYGAs, Dividends):
  
  Income Generated = $22,500 per year
  
  Lifetime Income Annuity Advantage = $35,700 - $22,500 = $13,200
  
  Dollar Difference = $13,200 more annual income from the annuity
  
  Percentage Difference = 58.2% higher annual income from the annuity
  
   

• At a 5.0% Interest/Withdrawal Rate (Bonds, CDs, MYGAs, Dividends):
  
  Income Generated = $25,000 per year
  
  Lifetime Income Annuity Advantage = $35,700 - $25,000 = $10,700
  
  Dollar Difference = $10,700 more annual income from the annuity
  
  Percentage Difference = 42.8% higher annual income from the annuity
  
   

• At a 5.5% Interest/Withdrawal Rate (Bonds, CDs, MYGAs, Dividends):
  
  Income Generated = $27,500 per year
  
  Lifetime Income Annuity Advantage = $35,700 - $27,500 = $8,200
  
  Dollar Difference = $8,200 more annual income from the annuity
  
  Percentage Difference = 29.7% higher annual income from the annuity
  
   

The Bottom Line: Do Inflation Adjustments For The Annuity Even Matter When Your Income Is Already 20%, 40%, or even 60%+ Ahead of Every Other Option on Day One?
 

So, let’s really break this down:

If you’re concerned about inflation and wondering if a lifetime income annuity can help, the question is:

Do you want your $500,000 in that scenario producing $35,700 a year from day one, or do you want to eek out just $20,000 in annual income year using a 4% market-based withdrawal rate?   Do you realize how many years it would take for a conventional method, even if it came with 3% inflation adjustments, to "catch up" to an income stream that's already 50%-60% higher on day one?  See what we mean?
 

When you understand the real math behind the numbers, you’ll see why we say “who cares!” when it comes to the annuity not having built-in inflation adjustments.

The reality is, if your $500,000 principal can produce $35,700 in guaranteed income, why worry about a gradual increase that doesn't even come close to this level of income?   Let's be real, it's not like any conventional income methods have any kind of "built in" inflation adjustments either.  You just withdrawal more each year until you run out of money, which is exactly what everyone is worried about to begin with.  
 

In fact, no conventional income method could possibly help you combat inflation when you have to tie up so much capital to achieve such mediocre cash flow. A $500,000 bond, CD, MYGA, or dividend strategy is only producing between $17,500 and $27,500, with a range of 29.7% to 104% less income than the annuity could provide.
 

How is this going to help anyone combat inflation when you're starting so far behind?

 

A Powerful Solution: Create Your Own Inflation Plan
 

But here’s where it gets even more interesting:

Just because a lifetime income annuity doesn’t come with built-in inflation adjustments doesn’t mean you’re stuck with level payments forever. You can actually create your own inflation plan by laddering multiple annuities to grow your income over time.
 

Enter Deferred Income Annuities (DIAs).

These annuities grow your funds at a guaranteed annual deferral rate of around 8%, similar to how Social Security grows while you defer it. These annuities allow you to turn on lifetime income whenever you're ready.
 

Imagine this:

You take that same $500,000 principal, but instead of purchasing one big annuity, you ladder a few smaller annuities together that each turn on income at staggered intervals. You start one annuity now for immediate income, then let another grow for 5 years, and a third for 10 years. Each one will be structured to begin payments at different times, but each will be a lifetime income stream.

 

How Does Laddering Work?
 

Laddering annuities can give you the ability to automatically increase your income over time. Do you want a 20% raise every 5 years? Done. It’s a matter of placing the right starting amounts in your annuity ladder, and simply letting some defer for 5 years, 10 years, etc., before turning on those income streams.

So, instead of relying on a single level income for life, you’re strategically layering income streams that grow with time and provide you with much more flexibility.

 

The Final Takeaway
 

The next time you hear someone complain that annuities don't offer any inflation protection, you’ll know exactly how to respond. The real math is on your side. A properly designed lifetime income annuity can provide far superior income from day one compared to any conventional method.

And when you combine the power of annuity laddering, you can create your own inflation-adjusted income streams that no other method could even hope to match.
 

You don’t have to settle for mediocre cash flow from bonds, CDs, MYGAs, or dividend portfolios. With a little strategic planning, you can maximize your income in retirement and ensure that your purchasing power holds up over time.
 

We hope this article has helped you see how lifetime income annuities can offer far more income than you might have imagined—and give you the power to build a custom inflation plan that will last throughout your retirement.
 

If you’re ready to take control of your retirement income and create a strategy that maximizes your income potential, it’s time to consider the power of lifetime income annuities and income laddering. It’s all about being strategic and using the tools available to you in the most effective way.
 

At the end of the day, the best way to fight inflation is to start with as much income as possible from the get-go—and lifetime income annuities can help you do just that.