What do you want to know
- Many clients struggle to save enough for retirement.
- Fewer have put in place defenses against inflation.
- Some annuities offer features that can help owners increase their income over time.
Inflation is a major concern for many people lately. As the consumer price index hits 40-year highs, your customers might be wondering how far it will go.
According to the Bureau of Labor Statistics, the CPI rose 7% last year. This is the largest 12-month increase since the period ending in June 1982.
Energy prices have jumped 29.3% over the past 12 months, and food prices have risen 6.3%.
These numbers are mind-boggling for many Americans, with 74% saying life is concerned about their purchasing power over the next six months, according to Allianz Life’s quarterly market perceptions survey of the fourth quarter. 2021, based on an online survey, with 1,004 people. respondents aged 18 and over, which was conducted in December 2021.
The threat of erosion of savings
The return of inflation is of particular concern to retirees who could lose purchasing power throughout their retirement or risk an erosion of their retirement savings.
Over the past 20 years, the CPI has increased by an average of 2% per year.
At a modest inflation rate of 2.5%, costs would double in around 28 years – and living 28 years after retirement is entirely possible, with people living longer and retirements spanning 25-30 years .
The extent of savings erosion a customer may experience due to rising costs varies greatly from person to person.
The exposure is based on a number of factors such as longevity, overall expenses and related inflation during the retirement years.
Revenue Boosting Tools
Many clients worry about whether they have “enough” saved for retirement.
A more compelling question is whether they have a strategy in place to increase retirement income.
Here are some of the different types of assets, along with their ability to produce increasing income and the relative risk associated with relying on these assets to increase income:
- Equities (high risk): Equities tend to exhibit market volatility and sequence of returns risk. They are unpredictable. But, in the past, they have generally tracked inflation over long periods.
- Real estate (high risk): The housing bubble can still make people nervous, and some people can’t afford to invest in real estate or don’t want to own property.
- Bonds (moderate risk): Rising interest rates tend to devalue bonds. The potential for higher rates in the future is causing many to shy away from bonds.
- Income from work (moderate risk): Working retirees can get raises, but the ability to work may last only part of retirement.
- Pensions (low risk): These may or may not have cost of living adjustments (COLA).
- Social security (low risk): Perks have COLAs.
It should be noted that while some low-risk increasing income sources, such as Social Security, have COLAs, these increases only apply to that income source, not to the client’s other income sources.
Also, a COLA does not 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 COLAs and the rate of inflation means that there is often a gap between a client’s income and expenses affected by inflation over time.