Rising costs don't stop when participants retire. Helping workers turn savings into sustainable retirement income can play an important role in addressing long-term affordability concerns.
One of the most talked-about issues in America right now: affordability. From grocery bills to health care premiums to housing costs, the rising price of everyday life is reshaping how workers think about their financial futures.
Affordability is often framed as a present-tense problem, while retirement savings is treated as a future concern. In reality, the same forces driving up prices today create retirement income challenges tomorrow. Rising costs do not stop when workers retire. Instead, inflation continues to erode purchasing power throughout retirement, increasing the amount of income retirees need while placing greater pressure on retirement savings.
Inflation does not retire when participants do
Most retirement planning models assume some level of inflation. But the lived experience of inflation is different from the modeled version. When the cost of groceries, utilities, and medical care rises faster than expected, participants feel the squeeze immediately. And for those already in retirement, the impact is magnified because there is no raise, no promotion, and no bonus to offset it.
Research from the Allianz Center for the Future of Retirement® shows that nearly two-thirds (66%) of Americans are worried that the rising cost of living will prevent them from enjoying their retirement.1
While Social Security includes cost-of-living adjustments designed to help offset inflation, most retirement assets, including savings accumulated in 401(k), 403(b), and 457 plans, must rely on investment growth to preserve purchasing power. This creates a difficult balancing act. A portfolio that is too conservative may struggle to keep pace with inflation, while one that is too aggressive could expose retirees to significant losses during market downturns. As a result, retirees often face the dual challenge of managing both inflation risk and market risk throughout retirement.
How the gap widens over a long retirement
The challenge is not simply that prices rise over time. It is that retirees often face two opposing forces simultaneously: The income needed to maintain their lifestyle increases, while the amount of income their portfolio can sustainably support may decline.
Inflation steadily increases the cost of everyday expenses, meaning retirees must withdraw more each year just to maintain the same standard of living. At the same time, longer life expectancies require retirement savings to last for decades, often leading retirees to reduce withdrawals to avoid depleting their assets too quickly.
Longevity & Inflation (PDF), a white paper published by Allianz Life, finds that over a 20-year retirement period:
- The amount of income a portfolio can sustainably support declines by 34%.
- Inflation reduces purchasing power by approximately 50%, requiring significantly more income to maintain the same standard of living.
The result is a growing gap between the income retirees need and the income their savings can comfortably provide. This creates a difficult dilemma. Retirees who increase withdrawals to keep pace with rising costs risk exhausting their savings sooner than expected. Those who limit withdrawals to preserve their assets may find their standard of living gradually eroded by inflation.
Why accumulation alone does not solve the problem
Defined contribution plans have historically been built for accumulation. The focus has been on getting participants to save, invest wisely, and grow their balances over a career. That focus has been effective in helping participants build their retirement savings.
But a large balance at age 65 is a starting point, not a finish line. Without a strategy for converting savings into sustainable income that can keep pace with rising costs over a 20- to 30-year retirement, even well-funded participants face the risk of outliving their resources.
The affordability pressures that dominate today's headlines are a preview of the pressures participants will face in retirement. And unlike working-age Americans, retirees have fewer levers to pull. They cannot easily increase their income, re-enter the workforce at the same earning level, or wait for the next economic cycle to recover.
For plan sponsors and advisors, this is not an abstract modeling exercise. It is the reality facing a growing number of participants as Americans live longer and costs continue to rise. This is why retirement income solutions, including guaranteed lifetime income options available within defined contribution plans, are receiving increased attention from plan sponsors, consultants, and policymakers.
What participants are already telling us
Participants already feel this tension. According to the Allianz Center for the Future of Retirement®, 61% of workers worry about running out of money from their employer-sponsored retirement plan.1 And 86% prefer receiving a steady stream of retirement income over the uncertainty of managing withdrawals on their own.1
That preference reflects a practical reality. Figuring out how to turn savings into retirement income is challenging, especially with unknowns around longevity, market volatility, and inflation. Participants are not asking for complexity. They are looking for options within the plans they already use that help address these risks.
How plan sponsors can address affordability in retirement
For plan sponsors evaluating their investment lineups, the affordability conversation offers a useful lens. The question is not just "Are participants saving enough?" but also "Does the plan offer tools that help participants manage the risks they will face after they stop working?"
Those risks compound in ways that are easy to underestimate. Longevity risk means a retiree may need income for 25 or 30 years, far longer than many participants plan for. Sequence of returns risk means a market downturn in the early years of retirement can permanently reduce the income a portfolio can sustain, even if markets recover later. And inflation risk means the purchasing power of every withdrawal declines over time, so the same dollar amount buys less each year.
When these risks overlap, the effect is multiplicative, not additive. A retiree who faces a market downturn at 66, followed by a decade of above-average inflation, may find their savings depleted far sooner than any single-risk model would predict.
Plan sponsors who proactively evaluate whether their plan addresses these risks are better positioned to meet participant needs. Adding options that help participants convert savings into sustainable income is one way to strengthen a plan's value proposition for both current and future employees.
Solutions like the Allianz Lifetime Income+® Annuity, which includes increasing income features, offer one approach to helping address these risks directly within the plan structure.
Connecting the dots
The affordability conversation happening at kitchen tables, in campaign ads, and across news cycles is fundamentally a conversation about purchasing power. And purchasing power is exactly what erodes over a long retirement when a plan lacks tools to address inflation and longevity risk.
For advisors and consultants, this connection is a powerful way to frame the retirement income conversation with plan sponsor clients. It moves the discussion from abstract risk categories to something tangible and timely: The cost of living is going up, and retirement plans need to account for that reality.
Three ways to bring this up in plan sponsor conversations
1. Link affordability today to affordability in retirement
"Employees are feeling the impact of rising costs today. How is the plan helping them manage those same affordability challenges in retirement?"
2. Focus on purchasing power, not just account balances
"The goal isn't simply accumulating assets. It's helping participants maintain their purchasing power throughout retirement."
3. Ask about income, not just savings
"If participants retired tomorrow, what tools does the plan provide to help turn their savings into sustainable retirement income?"
Bottom line: Affordability doesn't end at retirement. Framing retirement income as a long-term affordability solution can help make the conversation more relevant and timely for plan sponsors.
The plans that do, including those that incorporate in-plan guaranteed lifetime income options with features designed to help income grow over time, will be better equipped to deliver meaningful outcomes for participants. The plans that do not may leave participants facing the same affordability pressures in retirement that they struggled with during their working years, only with fewer resources to manage them.
