What is a disadvantage of owning a fixed annuity?

Owning a fixed annuity carries the disadvantage of decreased purchasing power during inflation because the returns on these annuities are typically fixed. This means that the payouts remain the same throughout the duration of the annuity contract, regardless of changes in the economy or inflation rates. As inflation occurs, the purchasing power of the money received from a fixed annuity diminishes since the cost of goods and services tends to rise. Therefore, over time, while the annuity guarantees a set amount, that amount may not be sufficient to maintain the same standard of living, leading to a situation where the individual could buy less with the same dollar amount in the future.

In contrast, guaranteed investment returns, while seen as an advantage, do not address the potential erosion of purchasing power due to inflation. Higher fees compared to variable annuities and low flexibility in payments might present challenges, but these issues are not as universally impactful as the erosion of value caused by inflation over time. Fixed annuities are secure and stable, yet they lack the growth potential found in other products, which can adjust for inflation, making the lack of inflation protection a critical disadvantage.