hero azl resources retirement risk study

Making the connection between longer retirements, the rising cost of living, and cognitive decline

As people spend more time in retirement than ever before, managing the complexities of inflation can pose a risk to retirement security.

As American life expectancy increases, clients are faced with spending more time in retirement. And while a long retirement sounds great in theory, it also requires careful planning when it comes to finances.

Over a 25-30 year retirement, the cost of living can creep up significantly, meaning clients have less purchasing power than they initially thought, especially when living on a fixed income. According to our 2020 Retirement Risk Readiness Study,* the rising cost of living is a concern for many.

57%
Over half (57%) of all Americans are worried inflation will make their basic retirement expenses unaffordable.
59%
Nearly six in 10 (59%) believe that the rising cost of living will prevent them from enjoying their retirement. 
24%
Yet, less than a quarter (24%) are discussing the impact of inflation with their financial professional.
21%
Only about two in 10 (21%) say they will use a financial product that allows for the opportunity for increasing income as a way to help address inflation.
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Rising healthcare expenses

Rapidly increasing healthcare costs are also a concern for people as they think about retirement. The study found that more than half (52%) of retirees said they view rising healthcare costs as one of the greatest risks to their retirement security, with nearly 40% of people not yet retired sharing that concern about their future expenses.

Perhaps even more alarming, both groups seem to have a poor sense of what their healthcare costs are now or will be in the future. Nearly half (48%) of current retirees said they have no idea of how much they currently spend on healthcare costs, and more than six in 10 (62%) people who have not yet retired said they have no idea of how much they will spend on healthcare in retirement.

If these costs weren’t already complex enough, trying to manage rising costs in retirement can be made even more confusing as clients age and their ability to manage complex financial matters likely diminishes over time.

As a financial professional, helping clients understand the true impact of inflation is important when building their overall retirement strategy. This is particularly true for clients who live on a fixed income solution, or who plan to rely more heavily on Social Security, which typically does not keep pace with inflation.

At the same time, having an honest conversation about the potential for cognitive decline can be helpful. While diminished mental capacity is certainly not something people like to think about, it’s still an important consideration as clients build a retirement strategy.

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Making a plan

Finding an increasing retirement income solution that can help address inflation can be complex, but there are some financial products – like certain annuities – that can provide the opportunity for increasing income potential through either built-in or optional riders that are available for an additional cost. Not only can these help address the rising cost of living, but they can also provide tax-deferred growth potential and the reassurance of a death benefit for beneficiaries.  

It’s important to start the conversation with clients now to get them thinking about how longer lifespans, inflation, and cognitive decline can combine to put their retirement security at risk. While clients may balk at addressing this complex issue today, careful planning, in partnership with their financial professional, can go a long way in helping to mitigate these risks tomorrow.

*Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k. Increasing income potential is provided through either built-in or optional riders at an additional cost.

Any distributions are subject to ordinary income tax and, if taken prior to age 59½, 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.