Data and Research April 19, 2016

Inflation Higher for Retirees

Older Americans experience higher inflation rates than other consumers, predominantly because of health care.
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Inflation remains a threat for retirement, particularly for older Americans, who experience higher inflation rates than other consumers. The main reason is the substantial amount of their budget devoted to health care, according to LIMRA Secure Retirement Institute’s 2015 Retirement Income Reference Book.

Current figures from the Centers for Medicare and Medicaid Services (CMS) show health care spending per person for the 65 and older population averaged $18,424 in 2010, three times higher than spending per working-age person ($6,125) and five times higher than spending per child ($3,628). CMS notes that overall health care expenditures increased 5.3% in 2014, and while that’s greatly improved from the 1990s when double-digit increases were common, it’s still significantly higher than today’s inflation rates.

Across the board, inflation remains a top risk for retirees and pre-retirees, even with inflation at its current rate of just under 1% (year over year, Mar. 2016, Bureau of Labor Statistics). Even a low inflation rate can significantly weaken purchasing power in the long run. LIMRA Secure Retirement Institute modeled the effect that 2% annual inflation could have on a 20-year retirement. Using a fixed monthly income of $1,341 (the average monthly benefit paid by Social Security) and assuming that monthly expenses increase from $1,341 to $1,993 at the end of the 20-year period, the inflationary impact results in a shortfall of $73,376. When the calculation is run at 3% inflation, the shortfall jumps to more than $117,000.

Illustrations like this can help pre-retirees and retirees better understand the importance of retirement products that make adjustments for inflation, LIMRA says. Retirees and pre-retirees can work with a financial professional to examine the effect of inflation on their retirement and develop a plan to mitigate this risk and others.

Compliance April 19, 2016

Senators Fighting Fiduciary Rule

Three senators introduced a resolution to stop the DOL’s new fiduciary rule, which they say will make retirement planning unaffordable for low- to middle-income Americans.
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Senators Johnny Isakson, R-Georgia, Lamar Alexander, R-Tennessee, and Mike Enzi, R-Wyoming, introduced a resolution to stop the Obama administration from implementing the Department of Labor’s (DOL) final fiduciary rule.

The senators filed a resolution of disapproval under the Congressional Review Act to reject the administration’s new rule. The senators say it will make retirement planning unaffordable for low- to middle-income Americans whose accounts are not valuable enough for advisers to take on the new legal liability created by the rule.

“I have worked to fight the implementation of this harmful rule since it was first proposed and promised to do all I could to overturn it before it can harm Georgia families,” says Isakson, who is chairman of the Senate Health, Education, Labor and Pensions Subcommittee on Employment and Workplace Safety. “The introduction of this resolution is the next step in the battle. Like so many of this administration’s decisions, their new fiduciary rule harms the very individuals it seeks to protect and prevents those hardworking Americans who are trying to plan for retirement from having the opportunity to access retirement advice.”

Alexander says he is concerned that under the final rule, many financial advisers won’t risk the new legal liability unless their clients have large accounts.

Adds Enzi, chairman of the Senate Budget Committee: “This rule is a solution in search of a problem. Right now a kid with a paper route, a family with some savings, or a small business looking to help their employees can get retirement planning advice from an adviser without much hassle. I am concerned that this new rule will cut off access for that advice unless you have more money to pay for increased fees the rule will likely cause.”

If approved, the resolution of disapproval would allow Congress to stop the Department of Labor from implementing the rule. Under the Congressional Review Act, the House and Senate vote on a joint resolution of disapproval to stop a federal agency from implementing a rule or regulation or issuing a substantially similar regulation without congressional authorization. A resolution of disapproval only needs a simple majority to pass and cannot be filibustered or amended, if acted upon during a 60-day window. The resolution of disapproval must also be signed by the president, or Congress can overturn a veto with a two-thirds vote in both the Senate and the House.

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