Perhaps you’ve heard or read that inflation is currently declining. In fact, the annual inflation rate has fallen from 2.50% in January to 1.63% today. That doesn’t, however, mean that the purchasing power of level income solutions is protected even in this low inflationary period. To illustrate, the chart below shows the erosion of purchasing power experienced from age 65 to age 85 on an initial payment amount of $5,000 and the seemingly low inflation rate of 1.63%.
Roughly 30% of purchasing power is eliminated even at this low rate of inflation over the course of 20 years. Obviously, the impact is significantly greater if inflation were to increase over that time frame, and with the historical inflationary rate being 3.22%, that probability is highly likely. We need to promote increasing income alternatives to our clients to make sure their income plan remains viable throughout retirement.
The chart below shows an increasing income design and a hypothetical annual income increase each year of 3% and the same 1.63% inflationary discount applied as well. This modest increase not only combats the inflationary impact, but also allows their purchasing power to grow by nearly 31% to age 85 ($5,000 to $6,564).
If we utilize the simple S&P Par Rate strategy and assume a 36% par rate, the 30-year average annual increase that would’ve been achieved is roughly 4.50%. The impact on income over time is dramatic.
By employing an increasing income design and a simple crediting strategy, we can turn a 30% or greater decline in purchasing power into a 76% gain in purchasing power!
Lets have the conversation today and start protecting those valuable retirement dollars!