Unless you protect your annuity from inflation, the payments you get today will buy a lot less in 10 or 20 years. Although inflation has averaged less than 3% since the 1990s, there’s no guarantee it will continue to be this low. In the 1980s, inflation was as high as 13%!
How can rising prices affect my annuity income?
Let’s say you have an annuity that pays $1,000 a month today. Assume that over the next 10 or 20 years, prices rise just 2% every year. If that happens, here’s how much less your annuity payment will be worth:
|
If... |
Then... |
|
Inflation is at 2% a year for 10 years. |
Your payment will buy only what $820 buys today. |
|
Inflation stays at 2% for 20 years. |
Your payment will buy what $673 buys today. That means your buying power is cut by one-third. |
How can I protect my annuity from rising prices?
Choose an option called indexing. Your payments will be much lower at first. But they will increase if prices rise. You could get anywhere from 30% to 45% less in the early years of your annuity.
Some people decide they don’t want inflation protection. They gamble that they won’t live long enough to regret it. But what if they’re wrong? That's the danger of not indexing your annuity.
Tip: Some people put half their money into an annuity with inflation protection and the other half into one without it. That covers some of the risk of losing their buying power.
Remember: Inflation can really affect your annuity income.
Make sure you understand how you can protect your income and how it will change the income you get in the early years. Then decide if an indexed annuity is the right choice for you.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
