Annuities as an Asset Class for Fee-Based Advisors l 18 © Envestnet 2022
As well, there are generally three options
regarding payments:
Fixed or level income annuity: These annuities will pay the same amount
on an ongoing basis for as long as the contract requires. The purchasing
power of the income payments will decrease over time as there is no
adjustment made for inflation. CANNEX notes that most requests it
receives are for this option.
COLA: A cost-of-living adjustment (COLA) provision allows payments
grow at a fixed compounding rate each year. For instance, if I decide that
2 percent is a reasonable assumption for future inflation, I might choose a
COLA of 2 percent with the intention of preserving the purchasing power
for my annuity income. If realized inflation ends up being higher, I will
lose purchasing power over time, but purchasing power would increase if
realized inflation ends up being lower. COLAs can only approximate the
inflation experience in retirement. With payments increasing over time, the
initial payment will be less than with a fixed or level annuity.
CPI: One could add a provision that the income growth rate of the annuity
payments precisely matches the Consumer Price Index (CPI). When
inflation is low, income grows more slowly, as do living costs for the retiree.
When inflation is high, income grows more quickly to better support the
increasing cost of living. CPI-adjusted income annuities hedge inflation
risk in the same manner as TIPS. These have been offered in the past, but
since January 2020 no company has been offering CPI-adjusted income
annuities in the United States.
Annuities as an Asset Class for Fee-Based Advisors l 18 © Envestnet 2022
