How can inflation affect annuity payouts?

Inflation has a significant impact on the purchasing power of money over time, which directly affects the value of fixed annuity payouts. When inflation rises, the cost of goods and services increases, meaning that the same amount of money buys fewer items than it did before. Fixed annuities offer a predetermined payout that does not change; therefore, as inflation rises, the real value of these fixed payouts diminishes. Essentially, while the nominal dollar amount of the annuity payment remains constant, the amount it can actually purchase decreases, leading to a reduction in the consumer's ability to maintain their standard of living. This change illustrates how inflation can erode the purchasing power associated with fixed annuity payouts.