Thomas J. Brock, CFA, CPA
  • Written by Thomas Brock, CFA®, CPA
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    Savannah Pittle
    Savannah Pittle, senior financial editor for RetireGuide

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is a professional writer and content editor with over 16 years of professional experience across multiple industries. She has ghostwritten for entrepreneurs and industry leaders and been published in mediums such as The Huffington Post, Southern Living and Interior Appeal Magazine.

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  • Financially Reviewed By
    Brandon Renfro, Ph.D., CFP®, RICP®, EA
    Brandon Renfro, RetireGuide Reviewer

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Retirement and Social Security Expert

    Brandon Renfro is a Retirement and Social Security Expert and financial planner. He focuses on helping clients create a secure financial future in retirement and co-owns Belonging Wealth Management. He is also a former finance professor and writes for several publications.

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  • Published: October 3, 2023
  • Updated: October 6, 2023
  • 7 min read time
  • This page features 10 Cited Research Articles
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How to Cite RetireGuide.com's Article

APA Brock, T. (2023, October 6). Cost of Living Riders for Annuities. RetireGuide.com. Retrieved April 12, 2024, from https://www.retireguide.com/annuities/riders/cost-of-living/

MLA Brock, Thomas. "Cost of Living Riders for Annuities." RetireGuide.com, 6 Oct 2023, https://www.retireguide.com/annuities/riders/cost-of-living/.

Chicago Brock, Thomas. "Cost of Living Riders for Annuities." RetireGuide.com. Last modified October 6, 2023. https://www.retireguide.com/annuities/riders/cost-of-living/.

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Key Takeaways
  • Adding a cost-of-living rider to your annuity entitles you to regular payment increases.
  • Exact payment hikes are based on projected levels of inflation and are typically adjusted annually.
  • Cost-of-living riders reduce the size of your initial annuity payouts.
  • Talk to your financial advisor to see if it’s a wise choice for you.

What Is a Cost-of-Living Rider?

Cost-of-living riders, also known as inflation riders or COLA riders, provide value protection for annuities. Payments from an annuity with a cost-of-living rider are adjusted automatically to keep pace with inflation and protect your purchasing power.

Annuity providers set the cost-of-living increases for their contracts. They usually calculate increases with movements of the Consumer Price Index (CPI), although, yields on government securities can also play a role.

Annuities are excellent for providing stable income in retirement, but their payments are often fixed, which can diminish their real value over time. By purchasing a cost-of-living rider, you can increase your fixed payments in line with inflation, allowing you to maintain a consistent level of purchasing power. In exchange, you'll receive a lower initial payment.
Brandon Renfro, RetireGuide Reviewer
Brandon Renfro Ph.D., CFP®, RICP®, EA

Pros of a Cost-of-Living Rider

Choosing a cost-of-living annuity rider protects your annuity payouts from the effects of inflation. With it, your payments will increase based on your insurance company’s cost-of-living index. As the costs of daily necessities rise, so will your payment amounts.

Cost-of-living riders ensure that your annuity payouts don’t lose value. No matter how long you live or how much inflation rises over the years, you should still be able to pay your daily and monthly expenses without sacrificing quantity or quality.

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How a Cost-of-Living Rider Guards Against Inflation

Inflation is the rate at which the cost of consumer goods rises from year to year. In most years, inflation sits at around 2%. A cost-of-living rider increases annuity payouts in response to these rising costs.

Say you receive $1,000 a month from your annuity and use those funds to pay for groceries, utilities and personal care products. If inflation increases the cost of those items by just 2% each year, they will cost $1,218.99 in 10 years.

Without a cost-of-living rider on your annuity, you would still only receive $1,000 a month. You would need to cut back on your purchases or come up with a way to increase your income to meet the elevated level of expense. This is no small feat for many retirees.

Fortunately, with a COLA rider, your payouts rise in step with rising costs.

Today's Best Fixed Annuity Rates

How Do Adjustments Benefit You?

Cost-of-living adjustments give you more stable buying power for life. You should always have enough money to afford the necessities of life, particularly, food and shelter.

Most cost-of-living riders adjust annuity payouts once a year. How much of an increase you get depends on the index your provider uses to approximate the rise in costs for that year. This means your money won’t lose its value from one year to the next.

How Annuities Work

How Does the Rider Provide Stable Income in Retirement?

The stability in cost-of-living riders stems from the annual increases in payments, which fosters stronger, long-term financial health. Each upward change prevents your retirement income from eroding, giving you confidence and peace of mind as you age.

Are Annuities a Good Investment?

Cons of Adding a Cost-of-Living Rider

The advantages of cost-of-living riders are impressive, but they have a few drawbacks that may outweigh the benefits.

Are There Increased Costs and Impacts on Initial Income?

Adding a cost-of-living rider shrinks the initial payment generated through an annuity. Moreover, it can take several years for your payout to match what you would have received without a rider. That said, the longer you live, the more the rider pays off.

Are Annuities a Safe Retirement Investment?

Are There Limitations or Caps to Adjustments?

Some annuity providers limit the frequency of cost-of-living adjustments or cap the size of those adjustments. If inflation rises too quickly or too high, your payouts may fall behind. Check your contract documents for limitations before purchasing a rider and shop around for similar policies with fewer limitations.

Cost-of-living adjustments can also fall behind if you make unscheduled withdrawals during your annuity’s accumulation period. Avoiding withdrawals will keep your annuity growing at a steady pace.

How Annuity Fees and Commissions Work

What Is the Impact on Inflation Protection?

Adding a cost-of-living rider to your annuity provides better inflation protection than forgoing this optional coverage. However, there’s still a chance inflation will outpace your payouts.

Payout adjustments are often based on inflation projection assumptions for the coming year. If the real inflation rate rises higher than your annuity provider’s projection, your payouts may not keep up with actual rising costs.

Types of Annuities

Is a Cost-of-Living Rider Right for You?

Cost-of-living riders aren’t for everyone. Purchasing a cost-of-living rider might not make sense for your circumstances. Suitability depends on your goals, income, the terms and conditions of your annuity and other life factors. Before choosing to buy a rider, consider your circumstances carefully and speak to a financial advisor about your retirement income needs.

Factors To Consider

Here are the key factors that might influence your decision to add a cost-of-living rider to your annuity.

Questions To Ask Yourself Before Purchasing
  • How worried are you about the possibility of inflation? If it’s not much of a concern for you, a cost-of-living rider may not be necessary.
  • Do you plan to use your annuity to retire? Most people need their retirement income to pay for their lifestyle, so investing in a cost-of-living rider may be appropriate.
  • How comfortable are you with assuming the risk of inflation on your own?
  • How soon will you receive payouts from your annuity? Do you expect to live long enough to make the first smaller payout a practical trade-off?
  • How much wealth do you have? Could you dip into your reserves if inflation ate into your static annuity payouts?
  • Will you have other income during your retirement? If so, are those income streams protected from inflation?
  • What are the fine-print terms of your annuity’s cost-of-living rider? Are there any caps or limitations that might affect how much it can protect your funds?
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FAQs About Cost-of-Living Riders

How can a cost-of-living rider impact my retirement income?
Cost-of-living riders adjust your future annuity payouts to compensate for inflation. This ensures that your retirement income rises with inflation over the years.
Will a cost-of-living rider cost me extra money?
Adding a cost-of-living rider to your annuity will reduce the size of your initial payout, but your payments will rise over time and can surpass the amount you would have received without the cost-of-living rider.
Which other riders work well with a cost-of-living rider?
Cost-of-living riders pair best with riders that can help cover the costs of unforeseen expenses. For example, a long-term care rider can shield you from the cost of future nursing home expenses.
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Last Modified: October 6, 2023

10 Cited Research Articles

  1. U.S. Bureau of Labor Statistics. (2023, January 23). Consumer Price Indexes Overview. Retrieved from
  2. https://www.bls.gov/cpi/overview.htm
  3. U.S. Bureau of Labor Statistics. (2023). CPI Inflation Calculator. Retrieved from https://www.bls.gov/data/inflation_calculator.htm
  4. Bishop, J. (2022, June 13). What are Annuity Riders or Provisions, and How Do They Work? Retrieved from
  5. https://www.entrepreneur.com/business-news/what-are-annuity-riders-or-provisions-and-how-do-they-work/429389
  6. Actuarial Standards Board. (2021, August 1). Actuarial Standard of Practice. No. 27: Selection of Economic Assumptions for Measuring Pension Obligations. Retrieved from http://www.actuarialstandardsboard.org/asops/selection-of-economic-assumptions-for-measuring-pension-obligations-effective-august-1-2021/
  7. Cotton, D. & Bodie, Z. (2020, January 31). Hedging Against Inflation Risk with Real Annuities. Retrieved from
  8. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3522659
  9. Social Security Office of Retirement and Disability Policy. (2017, May). Social Security Retirement Benefits and Private Annuities: A Comparative Analysis. Retrieved from https://www.ssa.gov/policy/docs/issuepapers/ip2017-01.html
  10. Beshears, J. et al. (2013, May 11). What Makes Annuitization More Appealing? Retrieved from https://www.hbs.edu/ris/Publication%20Files/annuitization.pdf