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1 Allianz Life Insurance Company of North America Allianz Life Insurance Company of New York Inflation The impact on health care costs and retirement strategies Clint Stuckey, CFP, ChFC, CFS Regional Vice President Retirement Consultant only not for use with the public. AMK 271 N (R 2/2012) Our Mission: and are the trusted authority in insured retirement solutions for consumers working with a financial professional. CE course announcements Today s course is approved for State Insurance, CFP, CLU, ChFC, and CPE (CPA) credits. Complete the CE attendance form. At the end of the session, you will enter the departure time and turn that into the instructor. Completion certificates will be mailed directly to you in the next 2 4 weeks. Please silence/turn off all electronic devices (cell phones, Blackberry, etc.) Put away all reading materials other than the classroom handouts. Please refrain from leaving the room until the break or end of the session. 2 Before we begin This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that and Allianz Life Insurance Company of New York, their affiliated companies, and their representatives and employees do not give legal or taxadvice. advice. Encourage clients to consult their tax advisor or attorney. (Allianz) and Allianz Life Insurance Company of New York (Allianz Life of NY) are affiliated companies. 3 1

2 Risks, if not addressed, can chip away at retirement savings. Accumulated Retirement Savings 4 Inflation Even modest rates of inflation can have long term effects Pre retirees/retirees need help to avoid problems caused by inflation Financial professionals helping clients with retirement income planning strategies have an ethical obligation to discuss the impact of inflation Even a modest 2.5% inflation rate means costs would double in about 28 years. 5 Agenda 1. Inflationary trends 2. Inflation concerns 3. Rising health care costs 4. Inflation best practices 5. Next steps 6 2

3 1 Inflationary trends 7 Inflation types Demand pull inflation Demand/supply theory 8 Inflation types Cost push inflation Caused by drop in supply due to increases in costs or natural disasters not excess demand 9 3

4 Inflation types Hyperinflation Prices rise by 50% or more per month Germany in 1922 and 1923 Zimbabwe in 2008 Greg Ip, The Little Book of Economics, How the Economy Works in the Real World, 2011, pp Other types of inflation Stagflation Slow economic growth and high unemployment (a time of stagnation) and a rise in prices or inflation. Deflation A sustained decline in the general level of prices. Often caused by reduction in supply or money or credit or decrease in spending. Disinflation A slowing in the rate of inflation. 11 Why inflation may be perceived negatively Hurts savers Leads to higher interest rates Influences when people buy Is generally hated by voters so politicians i i campaign against it 12 4

5 Can inflation actually be good? High inflation is destabilizing and corrosive; deflation can be destructive. The best inflation is not too high, nor too low: from 1% 3% seems about right. Greg Ip, The Little Book of Economics, How the Economy Works in the Real World, 2011, p Inflation is measured by the CPI Consumer Price Index (CPI) CPI W Ub Urban Wage Earners & Clerical Workers CPI U Ub Urban Consumers 80% of population Core CPI Excludes food and energy CPI E Senior Consumers Age Other inflation measurements Producer Price Indexes (PPIs) 1 Indexes that measure changes in the selling prices received by domestic producers of goods and some services (generally excludes services). Chained Consumer Price Pi Index for all Urban Ub Consumers Potential new indexing system proposed by the Obama administration. 2 Generally results in lower measures of inflation and is somewhat controversial. 3 1 Greg Ip, The Little Book of Economics, How the Economy Works in the Real World, 2011, p Star Tribune, July 8, 2011, page A3. 3 Why Krugman and his clan are dead wrong about inflation, Peter Schiff:, Investment News, January 22, pg

6 U.S. inflation history 1 60s 2.95% % 3.4% 70sAverage rate 8.1% % Average rate % since 1914: in 1970s: 80s 4.48% % % 90s 2.66% % 3.3% 8.1% 00s 2.35% % % 10s 2.35% % 1 U.S. Department of Labor, Bureau of Labor Statistics, All Urban Consumers (CPI U)), Inflation concerns 17 Consumer Price Index for senior Americans (CPI E) CPI E rose somewhat faster than CPI U by about.2% per year (December ) Medical care and owner occupied shelter components have larger relative weights in CPI E than in CPI U and CPI W CPI E not used for Social Security COLA index Focus on Prices and Spending, U.S. Bureau of Labor Statistics, Volume 2, Number 15, February,

7 Planning for longer retirements Women Women Men Men A 65 year old couple today has a 50% chance one will live to age U.S. Census Bureau, Statistical Abstract of the United States, 2012, Expectations of Life at Birth, 1970 to 2008, and Projections, , Table Blackrock, Prepared for Retirement, 2012, pg. 9, based on Annuity 2000 Mortality Table 19 Inflation may erode purchasing power $25 groceries today This hypothetical example is for illustration purposes only. 20 Inflation may erode purchasing power $25 groceries 20 years later 3% cost increase This hypothetical example is for illustration purposes only. 21 7

8 You may outlive your retirement income $700,000 $600,000 $500,000 $400,000 $300,000 8% 5% 6% 4% $200,000 $100, This chart shows how long retirement savings may last at a 4%, 5%, 6%,and 8% annual year end withdrawal rate. The chart is a hypothetical example and assumes $500,000 beginning balance in retirement, a 3% annual inflation rate, and a 6% annual rate of return, compounded monthly. This hypothetical example does not represent the performance of any specific investment product, taxes, or product fees Rising health care costs 23 Seniors spend more on health and medical expenses Age Age % 4% 16% 15% 11% 21% 4% 10% Miscellaneous goods and services Education Leisure, recreation, & hotels Transport & communication Health goods & medical services Housing Clothing & footwear Food & beverages 18% 1% 13% 11% 33% 15% 2% 8% Share of 2007 U.S. consumption expenditures for selected age groups Longer Lives, Changing Life Cycles: Exploring Consumer and Worker Implications, Credit Suisse, Economics Research, July 20,

9 Health care insurance and spending have risen faster than inflation ANNUAL inflation Health care SPENDING 3.1% 3.9% Health care INSURANCE 7.5% BlackRock, Prepared for Retirement, 2012, p 6. Graphic depicts year over year increase. 25 Estimated health care costs in retirement 65 year old couple with median drug expenses $283,000 Estimates only costs can be higher. EBRI Issues Brief Abstract, October 2012, Volume 33, No Fewer employers are offering retiree health insurance 35% 25% Employers offering retiree health insurance Employer Health Benefits 2012 Annual Survey, Kaiser Family Foundation, 2012, Section

10 Medicare costs Your clients must enroll to receive benefits if not currently receiving Social Security benefits When they enroll can affect their premiums Eligible first day of the month turning age Medicare costs Part A Hospitalization Part B Medical expense insurance Generally, no cost for coverage 2013 inpatient deductible $1,184 Daily coinsurance amounts Standard monthly premium of $ Higher annual income brackets pay higher premiums Means tested tax return from two years prior Centers for Medicare and Medicaid Services, CMS Product No , November Medicare costs Part C Medicare Advantage Plans Part D Prescription drugs Medicare health plan choice Sometimes called MA Plans May offer extra coverage such as vision, hearing, dental, and/or health and wellness programs For 2013: Premium averages $31/month Higher annual income brackets pay higher premiums. Deductible $325 Initial benefit limit of $2,970 Out of pocket threshold $4,750 Centers for Medicare and Medicaid Services, CMS Product No , November

11 Monthly Medicare premiums 2013 Individual income $85,000 Married couple income $170,000 PART B monthly premium $ standard premium Individual income >$85,000 up to $107,000 Married couple income >$170,000 up to $214,000 $ Individual income >$107,000 up to $160,000 Married couple income >$214,000 up to $320,000 $ Individual income >$160,000 up to $214,000 Married couple income >$320,000 up to $428,000 $ PART D monthly premium Plan premium $ plan premium $ plan premium $ plan premium Individual income >$214,000 Married couple income >$428,000 $ income = Modified adjusted gross income 31 $ plan premium Medicare options Medigap policies supplement Medicare Premiums vary depending on insurance company and extent of coverage Covers some costs that Medicare does not such as co payments, co insurance, and deductibles 32 Medigap policy examples Community rated (also called no age rated) Generally, the same monthly premium is charged to everyone who has the Medigap policy, regardless of age. Mr. Smith Age 65 $165 monthly premium. $165 monthly premium. Mrs. Johnson Age 72 This hypothetical example is provided for illustrative purposes only and does not represent actual clients. Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Center for Medicare & Medicaid Services,

12 Medigap policy examples Issue age rated (also called entry age rated) Premium is based on the age you are when you buy (are issued ) the Medigap policy. Mr. Smith Age 65 $145 monthly premium. $175 monthly premium. Mrs. Johnson Age 72 This hypothetical example is provided for illustrative purposes only and does not represent actual clients. Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Center for Medicare & Medicaid Services, Medigap policy examples Attained age rated Premium is based on your current age (the age you attained ), so your premium goes up as you get older. Mr. Smith Age 65 $120 monthly premium. $165 monthly premium. Age 66, $126 Age 67, $132 Age 72, $165 Age 73, $171 Age 74, $177 Mrs. Johnson Age 72 This hypothetical example is provided for illustrative purposes only and does not represent actual clients. Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Center for Medicare & Medicaid Services, Medicare does not cover nursing home costs Medicaid is a joint federal state program for low income individuals for nursing home and some other costs Subject to federal and state guidelines Program options and names vary from state to state (e.g., Medical Assistance or Medi Cal) Qualifications Vary from state to state Income and resource requirements also vary between states Long term care policies and riders may be needed Medicare and You, Centers for Medicare and Medicaid Services,

13 Annual long term care costs can be significant 2011 average annual nursing home costs by region BlackRock, Prepared for Retirement, Estimated annual retiree health care costs Expense Monthly cost Annual cost Couple Medicare A (hospital insurance premium) 1 $0 $0 Medicare B (medical insurance premium) 1 $ $1, Medicare Supplement (Medigap) 2 $165 $1,980 Medicare Part D (prescriptions) 1 $31 $372 TOTAL $ $3, $7, The cost of Medicare Supplement (Medigap) coverage varies based on the plan. INFLATION 30 years $7,574 $15, years $5,917 $11, years $4,622 $9,244 1 Centers for Medicare and Medicaid Services, CMS Product No , November Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Center for Medicare & Medicaid Services, Cost of living adjustments and inflation 39 Social Security Average annual cost of living increase last 25 years 2.8% Social Security Cost of living Adjustments, Social Security Administration, 2012 Medicare Part B Average annual premium increase last 25 years 6.3% Medicare: Part B Premiums, Congressional Research Service, Patricia A. Davis, December,

14 4 Inflation best practices 40 Talk to your clients Educate clients about the retirement reality of inflation Manage their expectations on income needs created by longevity and inflation Analyze income needs while both spouses are alive and for potential longevity of surviving spouse Review clients health status during annual reviews 41 Do the math Calculate reasonable inflation assumptions Consider impact from low interest rates and high inflation on real rates of returns When possible, inflate itemized expenses separately not in aggregate Example Health care costs inflations rate = X Discretionary costs inflation rate = Y 42 14

15 Provide recommendations Recommend strategies that include increasing income Consider long term care riders and policies Review guaranteed lifetime income annuities and whether the guaranteed income fits into a strategy to meet inflation concerns 43 5 Next steps 44 Next steps Have clients complete the Rethinking Retirement Strategic Workbook Provide clients with the inflation guide Follow best practices when guiding pre retirees and retiree clients about longevity and inflation 45 15

16 Summary 1. Inflationary trends 2. Inflation concerns 3. Rising health care costs 4. Inflation best practices 5. Next steps 46 Disclosures This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that and Allianz Life Insurance Company of New York, their affiliated companies, and their representatives and employees do not give legal or tax advice. Guarantees are backed by the financial strength and claims paying ability of the issuing company and do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions. Not FDIC insured May lose value No bank or credit union guarantee Not a deposit Not insured by any federal government agency or NCUA/NCUSIF Products are issued by, 5701 Golden Hills Drive, Minneapolis, MN In New York, products are issued by Allianz Life Insurance Company of New York, One Chase Manhattan Plaza, 38 th Floor, New York, NY Variable products are distributed by their affiliate Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN Only is authorized to sell life insurance or annuities in the state of New York. 47 Thank you! Questions? 48 16