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6/2/2013

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Allianz Life Insurance Company of North America

Allianz Life Insurance Company of New York

InflationThe impact on health care costs and retirement

Our Mission: Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York are the trusted authority in insured retirement solutions for consumers working with a financial professional.

For financial professional use only – not for use with the public.AMK‐271‐N (R‐2/2012)

costs and retirement strategies

Clint Stuckey, CFP, ChFC, CFSRegional Vice President ‐ Retirement Consultant

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

For financial professional use only – not for use with the public.

Allianz Life Insurance Company of North AmericaAllianz Life Insurance Company of New York

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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.

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 Allianz Life Insurance Company of North America and Allianz Life Insurance Company of New York, their affiliated companies, and their representatives and employees do not give legal or tax advice. Encourage clients to consult



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and employees do not give legal or tax advice. Encourage clients to consult their tax advisor or attorney.

Allianz Life Insurance Company of North America (Allianz) and Allianz Life Insurance Company of New York (Allianz Life® of NY) are affiliated companies.

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Accumulated Retirement S i

Risks, if not addressed, can chip away at retirement savings.



Savings

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Inflation

Even modest rates of inflation can have long‐term effects

Pre‐retirees/retirees need help to avoid problems caused by inflation

Even a modest 2.5% inflation rate means costs would double in



Financial professionals helping clients with retirement income planning strategies have an ethical obligation to discuss the impact of inflation

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about 28 years.

Agenda 1. Inflationary trends

2. Inflation concerns

3. Rising health care costs



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4. Inflation best practices

5. Next steps

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Inflationary trends

Inflation types

Demand‐pull inflation Demand/supply theory



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Inflation types

Cost‐push inflation

Caused by drop in supply due to increases in costs or natural disasters – not excess demand



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Inflation types

Hyperinflation

Prices rise by 50% or more per month Germany in 1922 and 1923



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y

Zimbabwe in 2008

Greg Ip, The Little Book of Economics, How the Economy Works in the Real World, 2011, pp. 66‐69.

Other types of inflation

Stagflation

Slow economic growth and high unemployment (a time of stagnation) and a rise in prices or inflation.

Deflation



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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.

Why inflation may be perceived negatively

Hurts savers

Leads to higher interest rates

Influences when people buy

Is generally hated by voters –li i i i i i



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so politicians campaign against it

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Can inflation actually be good?

“High inflation is destabilizing and corrosive; deflation can be destructive.



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The best inflation isnot 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. 83.

”

Inflation is measured by the CPI

Consumer Price Index (CPI)

CPI‐UU b

CPI‐ES i

CPI‐WU b W



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Urban Consumers

80% of population

Senior Consumers

Age 62+

Urban Wage Earners &

Clerical Workers

Core CPIExcludes food and energy

Other inflation measurements

Producer Price Indexes (PPIs)1Indexes that measure changes in the selling prices received by domestic producers of goods and some services (generally excludes services).

“Ch i d C P i I d f ll U b C ”



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“Chained Consumer Price Index for all Urban 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. 81.2 Star Tribune, July 8, 2011, page A3.3 “Why Krugman and his clan are dead wrong about inflation,” Peter Schiff:, Investment News, January 22, 2013. pg. 4

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U.S. inflation history1

60s

70s

80s

‘71

‘72

‘73

‘74

‘75

2.95%

8.1%

4.48% 6.9%

3.3%

3.4%

8.7%

12.3%70s Average rate

in 1970s:Average rate since 1914:1



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1 U.S. Department of Labor, Bureau of Labor Statistics, All Urban Consumers (CPI‐U)), 1914‐2012.

90s

00s

10s

‘76

‘77

‘78

‘79

‘80

2.66%

2.35%

2.35%

4.9%

6.7%

9.0%

13.3%

12.5%

8.1%3.3%

2



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Inflation concerns

Consumer Price Index for senior Americans (CPI‐E)

CPI‐E rose somewhat faster than CPI‐U b b t

Medical care and owner‐occupied shelter components have larger relative weights in CPI‐E than



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by about.2% per year (December 1982 – 2011)

“Focus on Prices and Spending,” U.S. Bureau of Labor Statistics, Volume 2, Number 15, February, 2012.

weights in CPI‐E than in CPI‐U and CPI‐W

CPI‐E not usedfor Social Security COLA index

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Planning for longer retirements

Women – 74.71

Men – 67.11

Women – 81.91

Men – 77.11

A 65‐year‐old couple todayhas a 50% chance one will



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1970 2020

1 U.S. Census Bureau, Statistical Abstract of the United States, 2012, Expectations of Life at Birth, 1970 to 2008, and Projections, 2010‐2020, Table 104.

2 Blackrock, Prepared for Retirement, 2012, pg. 9, based on Annuity 2000 Mortality Table

live to age 92.2

Inflation may erode purchasing power

$25 groceries today



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This hypothetical example is for illustration purposes only.

Inflation may erode purchasing power

$25 groceries 20 years later3% cost increase



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This hypothetical example is for illustration purposes only.

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You may outlive your retirement income

$700,000

$600,000

$500,000

$400,000 8%

6%

5%

4%



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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.

$300,000

$200,000

$100,000

65 80 88 95 110

8%

3



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Rising health care costs

Seniors spend more on health and medical expenses

Age 20‐29 Age 60+

Miscellaneous goods and services

Education

Leisure, recreation, & hotels

Transport & communication

15%

16%

17%

4%

11%

13%

18%

1%



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“Longer Lives, Changing Life Cycles: Exploring Consumer and Worker Implications,” Credit Suisse, Economics Research, July 20, 2011.

Share of 2007 U.S. consumption expenditures for selected age groups

communication

Health goods &medical services

Housing

Clothing & footwear

Food & beverages10%

4%

21%

11%

8%

2%

15%

33%

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Health care

Health careSPENDING

ANNUAL inflation

Health care insurance and spending have risen faster than inflation

3.1%3.9%



Health careINSURANCE

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BlackRock©, “Prepared for Retirement,” 2012, p 6. Graphic depicts year‐over‐year increase.

7.5%

$

65‐year‐old couple with median drug expenses

Estimated health care costs in retirement



$283,000

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EBRI Issues Brief Abstract, October 2012, Volume 33, No. 10.

Estimates only – costs can be higher.

Fewer employers are offering retiree health insurance

25%

35%



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Employers offering retiree health insurance

“Employer Health Benefits 2012 Annual Survey”, Kaiser Family Foundation, 2012, Section 11.

2004 2008 20122006 2010

25%

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Eligible first day of the month

Medicare costs

Your clients must enroll to receive benefits if not currently receiving Social Security benefits

When they enroll can affect



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turning age 65

When they enroll can affect their premiums

Medicare costs

Part A Hospitalization

Generally, no cost for coverage

2013 inpatient deductible $1,184

Daily coinsurance amounts



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Part B Medical expense insurance

Standard monthly premium of $104.901

‐ Higher annual income brackets pay higher premiums

Means tested – tax return from two years prior

Centers for Medicare and Medicaid Services, CMS Product No. 11579, November 2012.

Medicare costs

Part C Medicare Advantage Plans

Medicare health plan choice‐ Sometimes called “MA Plans”‐ May offer extra coverage such as vision, hearing, dental, and/or health and wellness programs

F 2013



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Part D Prescription drugs

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. 11579, November 2012.

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Monthly Medicare premiums

2013PART B monthly premium

PART D monthly premium

Individual income ≤$85,000 Married couple income ≤$170,000

$104.90 standard premium

Plan premium

Individual income >$85,000 up to $107,000Married couple income >$170,000 up to $214,000 $146.90

$11.60 + plan premium



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Individual income >$214,000Married couple income >$428,000 $335.70


“income” = Modified adjusted gross income https://questions.medicare.gov/app/answers/detail/a_id/2310

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



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Medicare co‐payments, co‐insurance, and deductibles

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.



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$165 monthly premium. $165 monthly premium.

Mr. Smith

Age 65

Mrs. JohnsonAge 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, 2012

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Issue‐age rated (also called entry‐age rated)Premium is based on the age you are when you buy (are “issued”) the Medigap policy.



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Mr. Smith

Age 65

Mrs. JohnsonAge 72



Attained‐age rated Premium is based on your current age (the age you “attained”), so your premium goes up as you get older.



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Age 66, $126 Age 67, $132 Age 72, $165 Age 73, $171 Age 74, $177

Mr. Smith

Age 65

Mrs. JohnsonAge 72


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



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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, 2013.

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Annual long term care costs can be significant



2011 average annual nursing home costs by region

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BlackRock®, “Prepared for Retirement,” 2012

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 $104.90 $1,258.80

Medicare Supplement (Medigap)2 $165 $1,980

Medicare Part D (prescriptions)1 $31 $372



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1 Centers for Medicare and Medicaid Services, CMS Product No. 11579, November 2012.2 Choosing a Medigap Policy: A Guide to Health Insurance for People with Medicare, Center for Medicare & Medicaid Services, 2012

Medicare Part D (prescriptions) $31 $372

TOTAL $300.90 $3,610.80 $7,221.60

INFLATION

10 years $4,622 $9,244

30 years $7,574 $15,148

20 years $5,917 $11,833

2The cost of Medicare Supplement (Medigap) coverage varies based on the plan.

Cost of living adjustments and inflation

Social Security Medicare Part B



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Average annual cost of living increase

last 25 years

2.8%

Average annual premium increase

last 25 years

6.3%Social Security Cost‐of‐living Adjustments, Social Security Administration, 2012

Medicare: Part B Premiums, Congressional Research Service, Patricia A. Davis, December ,2012.

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Inflation best practices

Talk to your clients

Educate clients about the retirement reality of inflation

Manage their expectations on income needs created by longevity and inflation



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Analyze income needs while both spouses are alive and for potential longevity of surviving spouse

Review clients’ health status during annual reviews

Do the math

Calculate reasonable inflation assumptions

Consider impact from low interest rates and high inflation on real rates of returns



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When possible, inflate itemized expenses separately –not in aggregate

‐ Health care costs inflations rate = X

‐ Discretionary costs inflation rate = Y

Example

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Provide recommendations

Recommend strategies that include increasing income

Consider long‐term care riders and policies

Review guaranteed lifetime income annuities and



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Review guaranteed lifetime income annuities and whether the guaranteed income fits into a strategy to meet inflation concerns

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Next steps

Next steps

Have clients complete the Rethinking Retirement Strategic Workbook

Provide clients with the inflation guide



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Follow best practices when guiding pre‐retirees and retiree clients about longevity and inflation

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Summary 1. Inflationary trends

2. Inflation concerns

3. Rising health care costs



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4. Inflation best practices

5. Next steps

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 Allianz Life Insurance Company of North America 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

Disclosures



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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 Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416‐1297. www.allianzlife.com. In New York, products are issued by Allianz Life Insurance Company of New York, One Chase Manhattan Plaza, 38th Floor, New York, NY 10005‐1423. www.allianzlife.com/newyork/. Variable products are distributed by their affiliate Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416‐1297. www.allianzlife.com. Only Allianz Life Insurance Company of New York is authorized to sell life insurance or annuities in the state of New York.



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Thank you!Questions?

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