Annuity Risk: Volatility and Inflation Exposure in Payments from Immediate Life Annuities

Some researchers have raised concerns about significant volatility in initial payments from fixed immediate life annuities and the subsequent inflation risk during the retirement period. This paper investigates these concerns using recent high frequency data. It finds that while there is significant volatility in initial payments from nominal fixed annuities, phased purchases of fixed annuities can reduce their volatility. It also finds that an inflation-adjusted annuity may address both the volatility and inflation risk problems. The results are applicable to current discussions about Social Security and trends toward the defined contribution type of pension plan.