U.S. Rate Hike Is A Major Milestone For Retirees

A key issue for retirees is whether inflation is heating up. The Labor Department said this week that the Consumer Price Index advanced 2 percent over the past 12 months, and it was up 0.2 in November, the third consecutive month inflation rose by that margin.

If the trend continues, seniors can look forward to a cost-of-living adjustment (COLA) in Social Security benefits for 2017 after getting no raise for this coming year. The latest Social Security trustee report forecasts a 3.1 percent COLA next year.

Even if seniors are able to sock money away in CDs or money market funds with slightly better yield, inflation will take its toll. “If you are earning 1 percent and inflation is 1.5 percent, that’s no different than earning 1.5 percent if inflation is 2 percent,” notes Greg McBride, chief financial analyst for Bankrate.com.

On the other hand, significantly higher interest rates over the next year also could make long-term care insurance and some types of annuities more attractive, since insurance companies look to bond market returns as a key element of pricing.

Long-term care policy premiums have spiked dramatically in recent years, due in part to the near-zero interest rate environment. A 1 percentage point rise in long-term interest rates generally translates into a decline in policy premiums of about 10 percent, according to Al Schmitz, a principal and consulting actuary at Milliman, a consulting firm that works with insurers.

Significantly higher rates also could boost payout rates for income annuities, which are priced based primarily on a buyer’s life expectancy. But interest rates also play an important role.

Experts have long argued that immediate annuities (or single premium income annuities) and deferred income annuities should play a bigger role in the arsenal of financial products for retirees, since they provide guaranteed income for life. But a near-zero interest-rate environment has depressed payout rates.

Yet recently updated industrywide mortality projections reflecting greater longevity estimates could counteract any improvement in annuity pricing due to higher interest rates.

“The whole thing could wind up being a wash,” said Stan Haithcock, an independent agent who specializes in annuities and writes about them under the moniker “Stan the Annuity Man.”