Yes, in fact they are MUCH more common than CPI-indexed SPIAs. Usually you have a choice of 1%, 2%, 3%, 4%, or 5%.Beliavsky wrote:We don't know what future inflation is going to be, but 2% is more likely than 0%. If insurance companies are reluctant to offer inflation-indexed annuities, annuities with payments that annually increase at a 2 or 3% rate could be a good alternative. Is there a name for an immediate annuity with payments that are contractually fixed but increasing over time? Is there a decent market in such "graduated annuities"?
I think--too lazy to check--Vanguard's longevity provider actually does offer fixed percentage increases on longevity annuities--starting when payments begin. And as others have noted if you get 3% per year after payment begin and you want to allow 3% per year for inflation BEFORE payments begin, you can just multiply the purchase amount by 1.8.
But it still speaks of the question of what you're paying the insurance company for. The risk isn't inflation, the risk is that inflation over 20 years might be different from your estimate, and as I noted earlier, historically, the value of $1 after 20 years is uncertain by nearly a factor of five--historically, the value of a dollar left under a mattress for 20 years has ranged anywhere from $0.30 to $1.42. That's a meaningful amount of risk.
If your best estimate is that you need $1,000/month in today's dollars, then in order to handle the downside you need to buy a longevity annuity that pays $3,300 a month twenty years from now--knowing that there is a chance that you are buying 4.8 times as much as you need!