A fixed annuity purchased by Lisa has what typical disadvantage?

• A. During periods of inflation, annuitants will experience a decrease in purchasing power of their payments.
• B. Payments increase with inflation
• C. Fixed annuities provide increasing payments
• D. Fixed annuities guarantee purchasing power regardless of inflation

Answer: (A)

Fixed annuities provide a guaranteed stream of payments that stays the same over time. The typical disadvantage is that, as inflation rises, those fixed payments buy less, so the real purchasing power of the income declines. The dollar amount is fixed, but prices increase, eroding value. Some products do adjust payments for inflation, but a standard fixed annuity does not, which is why the statement about decreasing purchasing power during inflation is the correct description.