The Burdens And Barriers Of Income Planning

Diminished Returns

Addressing the risk that inflation can have on retirement income

by Kelly LaVigne

Mr. LaVigne is vice president of advanced markets, Allianz Life Insurance Company of North America (Allianz Life). Visit

Inflation has been dominating the headlines for the past few months, with the consumer price index hitting 6.8 percent in November – the highest rate since 1982. While many of us are living with those rising prices day to day – from higher costs at the gas pump to increased costs for holiday gifts – those with retirement on the horizon may be wondering how this could impact their overall retirement plan.

In fact, according to the recent Allianz New Year’s Resolutions Study,[1] one quarter of Americans now view rising inflation as the single greatest risk to their retirement, more than doubling from 2020 (8%). And not surprisingly, Baby Boomers are the most concerned about the risk of the rising cost of living on retirement (34% vs. Gen X at 26% and Millennials at 19%).

The risk from inflation is something that should be considered as part of every retirement strategy. In general, maintaining a standard of living does get more expensive over time, this is especially important as the average retirements get longer. Consider that at a modest average three percent inflation rate, the cost of living can double in 24 years. And that doubling could come much sooner at the current rate of inflation! Of course there is the Social Security cost of living adjustment, but that doesn’t always keep pace (the 2021 COLA is 5.9 percent but the 2020 COLA was 1.3 percent). Keep in mind too that it’s not just consumer goods that are increasing, but healthcare costs and Medicare premiums are also increasing at a rapid pace.

So how can we help clients address this risk, and calm their nerves as they see the prices of the things they buy most often either creep up or in some cases double or triple practically overnight?

Address It Head On

If clients haven’t asked you about how to manage inflation yet, be proactive and bring it up. They likely have been hearing or reading about it or, at the very least, felt the pinch at the grocery store or gas pump, so the risk is top of mind. The study found that about six in 10 said they are concerned the rising cost of living could cause them to save less for retirement (61%) as well as for short-term goals, like a car (60%). Clients who are further out from retirement can start to take steps to mitigate certain risks in their financial future – the earlier they take protective actions the better.

Create An Income Strategy That Keeps Up With Inflation

Many clients worry about if they have “enough” saved for retirement. But a more compelling question is if they have a strategy in place for increasing retirement income to mitigate the chances their savings will run out prematurely. Financial products that offer income protection in retirement, like annuities, can help address those worries, and some 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 cost.[2]

If clients have a need for a death benefit, another potential option to supplement a retirement income strategy is fixed index universal life insurance. As long as a client’s policy is properly funded, they may be able to access the available cash value through policy loans and withdrawals[3] as a tax free way to boost their retirement income and help address rising costs without the additional tax burden. Those funds could also be used to cover some of those increased healthcare costs or an unexpected medical expense.

Plan For Both Now And In The Future

One quarter of Americans now view rising inflation as the single greatest risk to their retirement, more than doubling from 2020...

In addition to adding a strategy to mitigate inflation risks in retirement, help clients make a plan for the here and now. The study found that about five in 10 said they are concerned the rising cost of living will affect their ability to pay for necessities (53%) and cause them to cut back on non-essentials (52%).

Instead of cutting back on important things, discuss options to help them find new opportunities for saving. This could include cutting back on lengthy car trips to save on gas (remote work is a lot more common now, so they may be able to avoid the commute all together), comparing costs at different grocery stores and being diligent about shopping sales, or even exploring assistance programs to help with higher utility bills. It may not always be necessary to cut back or eliminate all the fun stuff as there may be new options to pay less for goods and services overall, although about one-third (32%) said they have reduced spending this year. These steps to save taken now can have a direct positive impact on retirement saving, and, if they become habit, they set up good financial behaviors for life.

Looking Ahead

Inflation may be here for a while. According to another Allianz study,[4] 78% of Americans expect inflation to get worse over the next year. Making a plan with clients now is an important step in helping mitigate this risk of rising costs both now and through a long, happy retirement.




[1] Allianz Life Insurance Company of North America conducted an online survey, the 2021 Allianz Life New Year’s Resolutions Study, November 15-17, 2021 with a nationally representative sample of 1,115 respondents ages 18 years or older.
[2] With the purchase of any additional-cost riders, the contract’s value will be reduced by the cost of the rider. This may result in a loss of principal and interest in any year in which the contract does not earn interest in an amount less than the rider charge
[3] Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.
[4] Allianz Life conducted an online survey, the 2021 Q3 Allianz Life Quarterly Market Perceptions Study, in September 2021 with a nationally representative sample of 1,005 respondents age 18+.