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Life Health > Annuities > Fixed Annuities

Inflation and Retirement Savings

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What You Need to Know

  • Many clients try hard to save enough for retirement.
  • Fewer have defenses against inflation in place.
  • Some annuities offer features that can help the holders increase their income over time.

Inflation is top of mind for many people lately. With the Consumer Price Index hitting 40-year highs, your clients could be wondering how high it will go.

According to the Bureau of Labor Statistics the CPI rose 7% last year. That’s the largest 12-month increase since the period ending June 1982.

Energy prices jumped a staggering 29.3% over the past 12 months, and food prices increased 6.3%.

Those numbers are eye-popping for many Americans, with 74% saying they are concerned about their purchasing power over the next six months, according to the 2021 Q4 Allianz Life Quarterly Market Perceptions Study, which was based on an online survey of 1,004 respondents ages 18 and older that was conducted in December 2021.

The Savings Erosion Threat

The return of inflation is particularly concerning to retirees who, could lose purchasing power throughout retirement, or risk erosion of their retirement savings.

Over the past 20 years the CPI rose on average by 2% per year.

At a modest 2.5% rate of inflation, costs would double in about 28 years — and living 28 years after retiring is entirely possible, with people living longer and retirements stretching 25 to 30 years.

How much savings erosion a client can experience due to rising costs varies widely by individual.

Exposure is based on a number of things such as longevity, overall expenditures, and related inflation during retirement years.

Income Increase Tools

Many clients worry about whether they have “enough” saved for retirement.

A more compelling question is whether they have a strategy in place for increasing retirement income.

The following are some of the different asset types, as well as their ability to produce increasing income and relative risk associated with relying on those assets for increasing income:

  • Equities (high risk): Equities tend to have market volatility and sequence-of-returns risk. They are unpredictable. But, in the past, they have generally kept up with inflation over long periods of time.
  • Real Estate (high risk): The housing bubble may still make people nervous, and some people can’t afford to invest in real estate or don’t want to be landlords.
  • Bonds (moderate risk): Increasing interest rates tend to devalue bonds. The potential for rates to increase in the future is causing many to shy away from bonds.
  • Earnings from work (moderate risk): Retirees who work can get raises, but the ability to work may last for only a portion of retirement.
  • Pensions (low risk): These may or may not have cost-of-living adjustments (COLA).
  • Social Security (low risk):  The benefits have COLAs.

It’s notable that, while some sources of low-risk increasing income, like Social Security, have COLAs, those increases apply only to that income source, not to the client’s other sources of income.

What’s more, a COLA doesn’t always keep pace with inflation. The 2021 Social Security COLA was 5.9%, for example, but the 2020 COLA was only 1.3%.

The difference between the COLAs and the inflation rate means that there is often a gap between a client’s income and inflation-impacted expenses over time.

An Income Adjustment Strategy

Clients might try to manage increasing their income to help address the effects of inflation on their own, but doing this can be complex, and a do-it-yourself approach means that the clients must rely on their personal savings to make up the difference in needed income.

Trying to manage this risk without a sound strategy can spell trouble down the road.

Transferring of a portion of the risk in an overall portfolio is one potential solution to consider.

Financial products offering retirement income that retirees can’t outlive in retirement, such as annuities, can help address those worries.

Some annuities even offer the opportunity for income increases throughout retirement.

These options may either be built into the contract or as an optional rider available for an additional cost.

Annuities offer tax-deferred growth potential, a death benefit during the accumulation phase, and a guaranteed stream of income at retirement.

The Conversation

When discussing the option of using an annuity with clients, make clients aware that an annuity can:

  • Help to cover retirement essentials like food, clothing, shelter, health care, and taxes.
  • Help mitigate inflation, market and longevity risk.
  • Allow for some flexibility in how other assets are managed for discretionary expenses.
  • Potentially leave more money upon death to fulfill legacy wishes.
  • Improve financial confidence throughout retirement.
  • Provide greater stability in investment advisor’s assets under management.

Inflation can be worrisome for clients who are approaching retirement, as they see expenses start to creep up.

But, by having a strategy in place to help manage this risk, they can address it head on and mitigate the chances that hard-earned retirement savings will run out prematurely.

Aimee Johnson (Photo: Allianz Life) Aimee Johnson is vice president of Advanced Markets and Solutions at Allianz Life Insurance Company of North America.




(Image: Sondem/Adobe Stock)


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