Inflation And Retirement Income: SPIAs Can Help

According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U), the common measure for inflation, rose by 2.6% from January 2002 to January 2003.

The 2.6% inflation rate seems reasonable when compared to the low current interest rate environment. However, without trying to mock football referees, the term “upon further review” comes to mind.

A closer look into the components of the CPI-U reveals some very interesting statistics for individuals who are either approaching or in retirement.

This, in turn, has important implications for annuity marketers, especially those working with immediate annuities.

First, some inflation basics:

Of the key expenditure categories that are used to determine the CPI, three in particular stand out in regard to their importance level to people approaching or in retirement. These are medical care, energy and food. After all, for this population demographic, staying healthy, keeping warm and eating tend to be a higher priority than buying the latest trends in clothing or going to college.

Food is fundamental. Food and beverages rose by only 1.0% last year, which is an inflation rate that many individuals can live with.

But here is some food for thought. When was the last time you went to the grocery store and you heard someone say, “Wow! Prices barely increased.” Probably not too recently. In fact, youve probably heard just the opposite.

Even though some food items (like cheese) supposedly declined in price, others, such as fresh vegetables (the key to good health!) rose 3.5%, according to the CPI-U during 2002.

Staying healthy. No new surprise here. Medical care keeps its steady trend upward with a 4.6% inflation rate in 2002, all while more and more retirees are being left to purchase health insurance on their own. From 1993 to 2001, employers offering health insurance to retirees dropped from 40% to 23%, leaving many retirees in search of their own expensive health care benefits. (See www.aarp.org, March 20, 2003.)

Getting around and keeping warm. Another must have for many retirees is gas and oil. Driving to see the family, to the golf course or to the doctors office is not free. Neither is staying warm (as you probably realized if you had to pay oil and/or gas bills recently). In fact, energy prices rose 14.1% in 2002, a far cry from the average 2.6% inflation rate as measured by the CPI-U.

Where will prices go from here? That is anybodys guess, but even during seemingly low inflationary times such as these, prices on essential items for the retirement demographic, such as health care and energy, are increasing at a rapid pace.

Retirees and those soon to retire depend on these services as much as any other demographic and must find ways to cover these higher costs now, during low interest rates and high equity market volatility, while preparing for future inflated costs. Additionally, they need to accomplish this while potentially not working or receiving a steady stream of income.

Annuities may be the solution retirees are looking for. A single premium immediate annuity may allow an investor to begin receiving an income stream, either for life or for a determined number of years, within a month of purchase. (All guarantees are based on the claims-paying ability of the issuer.) This income stream helps solve a retirees most pressing concerni.e., to create a steady and reliable source of income to help cover current costs.

But what about the impact inflation has on future expenses? This is clearly a concern for many retirees as they have the potential to live as long in retirement as they did during their working years.

In this scenario, inflation could reduce purchasing power quite substantially. Even projecting last years relatively low average inflation rate of 2.6% into the future, $100 today would only purchase $46.30 in goods and services in 30 years. Look into the rearview mirror, however, and things look much bleaker: $100 in 1971 and 1961 was reduced in purchasing power to $22.80 and $17.39 respectively by the end of 2001.

In todays bearish economy, investors rightfully are concerned about equities being the long-term solution to outpace inflation as they have been in the past.

Most experts believe they are, but tell that to investors who have seen three straight years of equity declines. The question now becomes, “How do I get the equity return exposure for my long term needs while protecting my future income source?” The answer may lie in a variable annuity that offers a guaranteed minimum income benefit rider.

A deferred variable annuity is a long-term investment product where capital gains, dividends and interest accumulate tax deferred. Most variable annuities offer a variety of investment options that allow investors to custom tailor a portfolio to meet their needs.

For those products offering living benefits, an investor can elect the GMIB rider for an additional charge. This may be appropriate for investors looking to maximize future income protection.

Lets assume an investor purchases a variable annuity for $100,000 and elects a 5% roll-up GMIB at issue (the most common GMIB in the industry). At the end of year 10 (most GMIBs require a waiting period prior to annuitization), the GMIB value would equal $162,990, assuming no distributions were taken.

Whats important here is that this is the worst-case scenario. Since the investor knows the GMIB rider is protecting his/her future income source, the investor is able to invest according to personal needs without fear of jeopardizing future income.

As an added bonus, the investment has the potential to exceed the guaranteed returns offered by the GMIB feature, particularly because the investor is not shying away from the equity exposure suited to their financial objectives.

These are uncertain times. Why not consider adding some certainty to your clients current and future income source with a combination of a single premium immediate annuity and a variable annuity (with GMIB rider).

Scott C. Curran, ChFC, CLU, CLTC, is president of The Curran Group, Little Falls, N.J., a member of the executive committee of the Mass Mutual Agents Association, and chairman of the associations accumulation products committee-annuites and retirement matters. You can e-mail him at currangroup@finsvcs.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.