A fixed annuity guarantees the dollar amount, not purchasing power. With PCE inflation at 3.7%, a $1,900 check buys meaningfully less each decade.
Social Security’s annual COLA, tracking 3.1% for 2027, preserves purchasing power over time in a way fixed private annuities fundamentally cannot.
Retirees can fight inflation erosion by adding a COLA rider, laddering annuity purchases across ages, or keeping part of the portfolio invested outside the contract.
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A $1,900 monthly annuity check that lands on the first of every month solves one problem exceptionally well. You cannot outlive it. That is really the case for annuitization in a single sentence, and it is exactly why insurers can market these contracts as guaranteed for life. But here is the catch. That guarantee covers the nominal dollar amount, not what it can buy. A decade later, that same $1,900 is going to buy a smaller basket of groceries, a smaller share of a Medicare supplement premium, and a much smaller slice of any long-term care bill.
This is the quiet arithmetic behind a level-payment annuity, meaning one in which the monthly payout never changes. Insurers price these contracts by projecting expected mortality and investment returns, then converting a lump sum into a flat stream. A flat stream is cheap to hedge, so it produces the highest starting check. Any feature that adjusts the payment upward over time, such as a cost-of-living adjustment rider, has to be paid for out of that same starting balance, which is why the first payment on an inflation-linked contract is meaningfully lower than on a level one.
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What a Fixed Check Actually Buys Over Time
Recent inflation numbers make this whole thing feel very concrete. Headline PCE inflation ran at 3.7% year over year in July 2026, with core PCE at 3.3% and services inflation at 3.7%. The Consumer Price Index for All Urban Consumers stood at 333.918 in July 2026, compared with 314.540 just two years earlier in July 2024.
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Purchasing power, which is just a fancy way of saying what a dollar can actually buy, erodes whenever prices rise, and your nominal payment stays flat. A precise ten-year erosion figure depends entirely on which inflation assumption you use, so that bracketed 25% figure you sometimes see should be read as illustrative of a decade of steady positive inflation, not as an actual forecast.
The categories that dominate later-retirement spending have historically risen faster than the headline number, and healthcare services and long-term care are the two biggest culprits. Average annual household expenditures reached $78,535 in 2024, up from $72,973 in 2022, and the spending mix shifts more toward medical care as households age.
Why Social Security Behaves Differently
Social Security carries an annual cost-of-living adjustment tied to CPI. The 2027 Social Security COLA is tracking toward 3.1% based on one of the three third-quarter CPI months. That mechanism is why a Social Security check written today buys roughly the same basket a decade from now, while a level annuity check buys less. On a national scale, Social Security transfer receipts totaled $1,645.4 billion in the second quarter of 2026, and every dollar of it carries built-in inflation protection that a fixed private annuity does not.
Options That Address the Erosion
Three approaches address the purchasing-power problem without abandoning the longevity protection that annuities uniquely provide.
Buy an inflation-adjusted or increasing-payment rider. A COLA rider raises the payment by a set percentage each year or ties it to a price index. The trade-off is a lower starting check, sometimes materially lower, because the insurer must reserve for future increases.
Ladder purchases over time. Buying smaller annuities at different ages spreads interest-rate and pricing risk and lets later purchases reflect the prevailing cost environment. A retiree who annuitizes at 65, 70, and 75 gets three different starting checks priced under three different rate regimes.
Annuitize only part of the portfolio. Using an annuity to cover essential fixed expenses, then leaving the remainder invested, preserves the ability to grow assets alongside inflation. Series I Savings Bonds offer one inflation-linked comparison, currently paying a composite rate of 4.26% with a fixed component of 0.9% and an inflation-linked component of 1.7%.
Weighing the Tradeoff
A fixed annuity still does something a portfolio cannot. It insures against outliving assets, which is the definition of longevity risk. That value is real, and it does not go away because inflation exists. The point is narrower. Guaranteed for life applies to the number on the check, while what that check buys is a separate question.
Inflation protection is a separate product feature with a separate price, and a retiree who wants both has to pay for both, either through a rider, a laddered strategy, or a mixed approach that keeps some assets working outside the contract (we walked through building a retirement paycheck from a mix of sources, calendar and withdrawal order included, in a free guide: The Paycheck Portfolio Method).
A $1,000,000 Income Portfolio
If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.
Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)
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