Inflation – even minor inflation – reduces purchasing power over time. Like the famed economist Milton Friedman once said, it’s the hidden tax that creeps up on us because it is not legislated. Inflation slowly reduces the dollar’s value meaning each dollar will buy less and less. Many people look to the Bureau of Labor Consumer Price Index (CPI) for the inflation rate, but costs such as food, fuel, and healthcare have risen faster on occasion than the CPI. Inflation in retirement can be detrimental to your long-term financial security if unchecked. 1
According to data from the Bureau of Labor Statistics Consumer Price Index, the long-term average inflation rate is between 2% and 4% annually. That means if you were to stuff your money under a mattress, it would be worth 2% to 4% less per year. For example, with an inflation rate of just 2% over the next 15 years, you would need $135,000 then to buy what $100,000 buys you today. If the inflation rate is 3%, you would need around $155,000. Here are a few ways inflation can impact your retirement, some of which you may not have considered. 1, 2
Overlooking price increases for some goods and services
By going grocery shopping and putting gas in our cars, we know that prices go up over time. There are a few expenses, however, that are a significant part of retirement expenses that may even outpace the inflation rate. For instance, cost increases for health care. Over the last decade, the Bureau of Labor Statistics has shown that the medical care prices increased by roughly 3.3% per year. Factoring in the rise in prices of all goods and services, not just the most obvious, can help your overall financial planning. 3
Cost-of-living adjustments (COLA) for Social Security and the effect of inflation
Social Security benefits are supposed to keep pace with inflation by law through the cost of living adjustments (COLAs). Still, according to Senior Citizen’s League studies, COLAs may not keep pace with inflation. Changes in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers), one of the components of the Consumer Price Index, determine the COLA amounts. The CPI-W combines everything in its prices, from the price of cars and computers to everyday staples such as bread and eggs. In the process of gathering an aggregate benchmark, certain sectors relevant to retirees may be overlooked. While Social Security can be a great income resource for a person in retirement, you should not depend on Social Security alone to keep up with your rising spending needs throughout retirement. 1, 4
Investment management and staying ahead of inflation
Your retirement portfolio may be heavily weighted in fixed-income investments. While fixed-income has been less volatile than stocks during market downturns, they have not kept pace with inflation in the long term. However, the U.S. stock market’s historical average annual return has been around 7%, which has outpaced inflation. While stocks are not without risk, they offer a chance at beating inflation over time. 1, 3, 5
More efficient living in retirement
Without wage growth or income from a job to stem rising prices in retirement, many seniors may try to cut back on their retirement lifestyle. You can, however, still live the life you have always dreamed of while protecting future purchasing power by living more efficiently. That is because being efficient in retirement is not the same as being skimpy. For example, making your home “green” and energy-efficient can reduce your dependence on future energy prices while also making for a more comfortable existence. Or you may wish to grow a garden of natural fruits and vegetables, which can safeguard against inflated food prices and give you a healthier lifestyle. Or, if you want to travel luxuriously now that you have the time and funds to do so in your retirement, you can see about destinations you’ve always desired to visit where your dollar stretches even further. 5.
1 – http://fool.com/retirement/2019/03/03/3-ways-inflation-affects-your-retirement.aspx
2 – nerdwallet.com/blog/banking/how-to-stop-inflation-from-sinking-your-savings-goals/ [9/4/18]
3 – money.cnn.com/2017/11/01/retirement/inflation-retirement/index.html
4 – moneytips.com/inflation-concerns-for-retirees
5 – thebalance.com/how-to-plan-for-inflation-in-retirement-2388671
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