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.
What Your Peers Are Reading
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.