COLA (Cost of Living Adjustment)

How COLA Works

With COLA, your income increases each year by a fixed percentage regardless of actual inflation rates. Common COLA options:

1% annual increase: Most conservative
2% annual increase: Most common
3% annual increase: Aggressive inflation protection
CPI-linked: Tied to actual Consumer Price Index (rare, expensive)

📊 COLA Impact Over 20 Years

$200,000 Premium, Age 65 Male, Life Only

No COLA:
$1,500/month for life
Year 1: $18,000/year
Year 20: Still $18,000/year

With 3% COLA:
$1,100/month starting (27% lower)
Year 1: $13,200/year
Year 10: $17,750/year
Year 15: $20,600/year
Year 20: $23,850/year

Break-even: Around year 12, COLA payments surpass fixed payments

The Cost of COLA

Adding COLA reduces your starting income by 20-35% depending on rate chosen:

1% COLA: ~20% lower starting payment
2% COLA: ~25% lower starting payment
3% COLA: ~30-35% lower starting payment

Who Should Choose COLA?

COLA makes sense if:

You're young (60s) with long life expectancy
You can afford lower starting income
Inflation is your primary concern
You have other income sources to supplement early years

Skip COLA if:

You're older (75+) — less time to break even
You need maximum income now
You have other inflation-protected income (Social Security)
You prefer higher starting payments

COLA vs. No COLA Break-Even

It typically takes 10-15 years for COLA payments to exceed fixed payments. If you don't live that long, you received less total income with COLA.

The Bottom Line

COLA protects against inflation but costs 20-35% of starting income. Best for younger annuitants with long life expectancy who can afford lower initial payments. For those needing maximum income immediately or with shorter life expectancy, fixed payments without COLA make more sense.