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Examining the impact of inflation on retirement savings

Making a plan now can help alleviate risks down the road

Inflation is top of mind for many people lately, and with the Consumer Price Index (CPI) 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 – 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 a recent Allianz Life study.*

This 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%. At a modest 2.5% rate of inflation, costs would double in about 28 years – which is entirely possible with people living longer and retirements stretching 25-30 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.

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Addressing inflation risk with increasing income

Many clients worry about whether they have “enough” saved for retirement. But a more compelling question is whether they have a strategy in place for increasing retirement income.

And while some sources of income, like Social Security, have cost-of-living adjustments (COLA), those increases only apply to that income source. What’s more, it doesn’t always keep pace (the 2021 COLA was 5.9% but the 2020 COLA was only 1.3%). That means there is often a gap between what clients determined their retirement income would be and what their expenses actually ended up being.

Clients might try to manage increasing their income to help address the effects of inflation on their own, but it can be complex, and it means they 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.

A transfer 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 in to the contract or optional and available for an additional rider cost. Annuities offer tax-deferred growth potential, a death benefit during the accumulation phase, and a guaranteed stream of income at retirement.

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.

*Allianz Life conducted an online survey, the 2021 Q4 Allianz Life Quarterly Market Perceptions Study, in December 2021 with a nationally representative sample of 1,004 respondents age 18+.

Withdrawals will reduce the contract value and the value of any protection benefits. Withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal additional tax.

Guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.

• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF

Products are issued by Allianz Life Insurance Company of North America. Variable annuities are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.

Product and feature availability may vary by state and broker/dealer.