Let’s consider a married couple, both aged 65. Actuaries say that at least one of them is likely to be alive at age 91.5. Since ladies are the stronger gender, they’re more likely to be the last survivor. This means that conservatively our hypothetical couple should plan retirement for at least 30 years. Think back to 30 years ago and compare the prices in that world to the present one. Inflation is especially hard on retirees living on fixed incomes. At an annual inflation of 8% [current inflation for medical care], what cost $1,000 today will cost $8,000 in 27 years – years before our couple’s retirement will end. What is the outlook for future inflation, in general, and for retirees specifically?
It is an economic fact that raising taxes in recessionary times will make matters worse; thus, the money presses are working overtime to end the current economic recession. The federal debt is exploding. A Social Security system that cannot continue on the same financial footings as in the past and Medicare programs whose costs are rapidly rising with an aging population, serve to widen the gap between federal spending and taxes collected. Complicating the tax-spending imbalance are the war on terrorism, crumbling infrastructure like highways, high unemployment and needy non-federal governments on the brink of bankruptcy. These all point toward the certainty of much higher general inflation for the future.
Retirees are the fastest growing segment of the population and this means even more inflationary pressure on “all things retirement”. The retirement safety net is Social Security and, thankfully, benefits rise with inflation. Granted there is some concern about its survival, but given the large voting bloc that would be alienated, stopping Social Security is not politically feasible. Yes, there may be more taxes on benefits and future retirees may be shortchanged, but today’s retirees are assured of continued benefits and inflation adjustments. Unfortunately, Social Security is not enough for the lifestyles of most retirees; thus, how can retirement purchasing power be protected against future inflation?
As life expectancy has risen and more than 75 million baby boomers have reached retirement age, the insurance industry, which manages risk of all kinds, has developed new products to protect purchasing power in retirement. Your purchasing power can be safeguarded by giving an insurance company a fixed amount of money today in exchange for the guarantee of a lifetime income that keeps pace with inflation. How much money is needed for your lifetime inflation-adjusted income depends on the age when you’ll start receiving it and the amount of income you choose. Smart retirees will determine the fixed purchasing power (inflation-adjusted income) needed in retirement for their planned lifestyle. Subtracting the amount of Social Security and other income you’ll have from this needed amount yields the guaranteed lifetime income required. It is now a matter of deciding at what age the income should start.
Those that die prematurely will subsidize those that live too long: the same concept as homeowners’ insurance where those whose homes do not burn help pay those whose homes do. Since the insurance company is managing the risk of uncertainty, you and your loved one get the security of a guaranteed inflation-adjusted lifetime income you cannot outlive. Eliminated are market risks, future inflation, changing future interest rates and all things uncertain. You can forget about the greatest fear of most retirees: outliving your money. How do you get started on this guaranteed lifetime income pathway? Talk to your financial advisor about your needs and how best to meet them: there are many options and great flexibility. Unless you investigate this solution, inflation will be a retirement concern.
Shelby J. Smith, Ph.D.
October 2010
Thanks for this post. I have a hard time finding good content
related to this subject when searching most of the time.
I also run a blog similar to yours and here’s part of one of my
recent posts…
While there was once a standard age for retirement in this country and people could count on their company pension plans or retirement funds to get them through their twilight years we are finding that people are often living longer than their funds intended and that their quality of life in these years is much better than in decades past. In fact, we are seeing a growing number of retirees that are dedicated to health and good, clean, fun living. This is something almost unprecedented throughout history and yet our retirees are younger in many ways than ever before.