Income Annuities and Inflation: Are There Cost-of-Living Adjustments?

Written by Hersh Stern Updated November 25, 2025

Income annuities are a great way to secure your retirement. They offer:

• Guaranteed lifetime income
• A variety of payout options
• Tax advantages, among other things

But many people want to know, can an income annuity keep up with inflation?

The primary form of inflation protection for an income annuity is a Cost-of-Living Adjustment (COLA), which can be added as an optional rider to an annuity contract.

But how do COLAs work? Are they worth adding to your contract? And do they actually keep up with inflation? We’re going to discuss these questions and more below.

How Does a Cost-of-Living Adjustment (COLA) Work?

Before discussing the merits of a COLA, we need to explain how they function.

Most COLAs work like this:

1. You select an annual COLA rate (typically between 1% and 5%)
2. The insurer quotes your initial income rate
3. Your income increases each contract year by your selected COLA rate

COLAs are actually pretty simple: you choose the percentage you want your payout rate to increase by each year, and the insurance company lowers your initial payout to account for these increases.

Each contract year, your income rate increases by your COLA rate. For many insurers, your COLA is compounding, meaning that the percentage increase is based on the prior year’s income rate.

How Much Does A COLA Change Your Annuity Income?

This depends on the underlying factors that set your annuity rate: your age, income start date, etc.

You can run annuity quotes on our website using our blue annuity calculator. Simply enter the COLA rate on the next page. We’ll show you quotes with and without COLA adjustments so you can instantly compare your options.

Do Cost-Of-Living Adjustments (COLAs) Keep Up With Inflation?

While adding a COLA to your annuity can help offset some inflationary pressure, it’s not a true cost-of-living increase that follows a metric like the Consumer Price Index. You choose your COLA rate when you buy your annuity, without knowing what future inflation will actually be.

Depending on what COLA rate you choose, your income may grow faster or slower than what inflation actually is.

Additionally, not all expenses grow at the same rate. Some categories may experience higher rates of inflation than others: for example, property taxes, groceries, travel, and medical expenses all experience inflation but at different rates.

For that reason, when selecting a COLA (or not), consider what you think you will use annuity income for, and how much that might increase over your retirement.

Is Adding a COLA to Your Annuity Worth It?

Let’s consider the most important question: are COLAs worth it?

To assess this, we’re going to look at income streams from immediate annuities for two 65-year-olds (one male and one female). We will examine their income for no COLA and COLAs options from 1% to 5%.

When comparing COLA options, we consider:

• Annual income – how much the person is paid each year
• Accumulated income – total payments received over time

Annual Income

The charts below show annual income through age 100. For both the 65-year-old man and woman, the age at which a COLA annuity produces more annual income than a level annuity is around age 75.

This means they would need to wait about 10 years before receiving more per year than they would have without a COLA.

This can be beneficial if you’re concerned about inflation reducing your buying power later in retirement.

However, some people expect their spending to decrease as they age. That is a personal decision only you can make.

Accumulated Income

Accumulated income tells us how much money is received in total from the annuity.

Looking at the charts below, it takes close to 20 years for any COLA annuity to surpass the “no COLA” (level-pay) income annuity in terms of income accumulation.

In other words, either annuitant would have to live to about age 85 to have received more money by adding any COLA to their annuity.

The reduction in annuity income in those early years can have a major impact on lifetime earnings.

Key Factors to Consider with a COLA Annuity

Whether a COLA is right for you depends on:

• How long you realistically expect to live
• How important early retirement income is to you
• Whether you plan to manage inflation with other assets
• How your spending needs may change later in life

COLAs Can Be Powerful in Later Years, But Aren’t For Everyone

If you are worried about inflation eroding your buying power, a COLA may be appealing. However, make sure you understand the trade-offs of including a COLA:

• Reduced income in earlier years
• A long time to “catch up” to the non COLA option, longer for lifetime earnings
• COLA increases cannot be changed

Many of our clients do not add COLAs to their annuities. They prefer higher guaranteed income in their early retirement years, when they expect to be traveling, spending money on their grandkids, or going out more.

Instead, they plan for inflation in other ways like:

• Using an annuity ladder to increase guaranteed income over time
• Holding other investments that help offset inflation

Others simply want predictable income to cover stable expenses, and they expect their discretionary spending to decline with age—even if prices rise.

Disclaimer: Annuity rates change frequently. All income figures in this article reflect rates available at the time of writing. This content is for informational purposes only and is not a recommendation to purchase an annuity or to add a COLA rider. Before buying an annuity, consult with a qualified financial professional or tax advisor.

References:

“Why Your Retirement Spending Won’t Follow Inflation (And What That Means for Your Plan)” Credent Wealth Management, May 23, 2025.
“Taking the Mystery Out of Retirement Planning” U.S. Department of Labor
Consumer Price Index, Bureau of Labor Statistics.