William and Alice James are both 65. They have $300K each in 401(k)s and $500K in regular assets. They both receive $17K annually from Social Security. They have no children. They have a modest home.

If William and Alice invest their 401(k)s in inflation indexed bonds yielding 2.4 percent in real terms (after inflation) and take steady withdrawals from their 401(k)s, ESPlanner says they can spend $59,692 each year in today’s dollars on consumption.

But what if they annuitize their 401(k)s, i.e., what if they use their 401(k) account balances to buy annuities? Will this raise their living standard?

To answer this question we re-ran ESPlanner using using the fully inflation-indexed annuity quote we received from ELM Income Group.

The results show that the couple will improve their living standard by 15.4% over their remaining 37 years of life. Their consumption1 will rise from $59,692 to $68,887, a significant improvement in their living standard.

How did this work? By annuitizing their 401(k)s, they create a guaranteed stream of income of $21,051 for William and $19,028 for Alice. This is an improvement over what they will earn in their 401(k) using inflation-indexed government bonds.
The results show that the couple will improve their living standard by 15.4% over their remaining 37 years of life.

Other insurance and investment companies are starting to offer inflation-indexed annuities. Elmannuity.com seems to offer the best rates as of this writing. Their inflation-adjusted income annuities are issued by the Principal Life Insurance Company, Des Moines, Iowa.