For retirees, one of the most popular financial products is the fixed annuity contract. This product has allowed seniors a way to evenly distribute their retirement funds into a series of fixed payments, and can even allow the income stream to last for the duration of their lifetime. Because of this lifetime income, fixed annuities have found an almost permanent place at the retirement planning table.
Fixed annuities are certainly not the end-all of financial planning however. It is important to note that there are pros and cons to every financial product; the annuity is not an exception to this rule. Many seniors have found themselves in a difficult situation because they did not fully explore the ramification of their purchase beforehand.
Though the list of fixed annuity disadvantages can be rather long (as is the list of advantages), one of the most notable risks comes in the form of inflation. The very nature of a fixed annuity is that the income stream is fixed. The payments are made in either a fixed number of years, or with a fixed dollar amount per period. This fixed dollar amount exposes the product to a certain degree of inflation risk other variable products do not face.
For this reason, many insurance companies will offer a cost of living adjustment option to the annuity contract. This is intended to help keep the annuity payments up with current inflationary pressures. However, this cola option is not able to counteract the effects of hyperinflation on the account. In years that hyperinflation is expected, the fixed annuity contract will take a sizable hit. The purchasing power of your income payments can drop drastically. This can have devastating effects if the annuity is used as primary source of income during retirement.
If years of inflation or hyperinflation are expected, you may want to consider placing your money in a more suitable retirement vehicle. Otherwise, the fixed annuity can still be a very good retirement planning tool. A good financial planner will be able to help you sort through the different scenarios in which the annuity may or may not be right for you.