When planning for retirement, the goal is create future spending power that can deliver a more secure future. Inflation can weaken your future spending power if you don't account for it in planning. As you go through the daily motions of buying necessities, inflation rarely comes to mind. Without proper planning, it will not become a serious thought until you are in retirement and evaluating your spending power. Thinking about inflation while investing for retirement is critical to preserve funds and afford proper care as you age. Proper planning can help your precious retirement income last through your lifetime or beyond.
Here is what you should know about retirement and inflation to stay on track with your investment goals.
What is inflation?
Inflation is the increase in the price of goods and services that erodes your purchasing power. What you once can purchase with a certain amount of money changes and now takes more dollars to buy. There are different types of inflation, but a general understanding of it is the first step. Take a look at a few examples to get a clear picture of what inflation is and how it changes what your money can do.
If you have been to the grocery store lately, you may have noticed the candy items at the front of the store have increased to close to $1 or more when they used to only cost 50 cents. The same $50 that used to be enough to purchase groceries for two family meals is barely enough for one meal. On a larger scale, economy cars that used to be $5,000 to $10,000 have a current selling price of $20,000 or more.
What does all this have to do with retirement?
Inflation can shrink the amount of money you have to both enjoy retirement and fund necessities in old age. In early retirement, most people plan to travel, buy a new car, and enjoy life without working hard. Later down the road, retirees may prefer to stay close to home and spend less. In the final stages of life, medical needs are most critical.
If you follow this path, inflation could prevent your travel plans. More importantly, reducing your spending power could force you to choose between healthy food or vital medicine. Throughout a 30-year retirement, expenses are likely to increase several times. Without inflation planning, you could experience a gap of over $100,000 at retirement. Use the retirement calculator, which factors in inflation, to get a clear picture of what retirement will look like based on your savings and benefits.
How does inflation affect retirement?
It depends on your income level, which also depends on how much you save and how well you plan. Incomes less than $75,000 tend to feel the impact of inflation more than those with higher annual incomes.
As you reduce spending during retirement, higher income levels have a cushion to cover damages from inflation. Lower income levels will have a noticeable decrease in what they can afford to spend.
What is hyperinflation?
Inflation planning in retirement uses an average as the basis, but hyperinflation is possible from year to year. When the cost of goods and services suddenly rises to 50 percent or greater from month-to-month, hyperinflation occurs.
How does inflation impact Social Security?
Some retirees depend on social security income to fund the majority of their retirement. Fortunately, social security recipients will already be prepared with cost of living adjustments included. Cost of Living Adjustments (COLAs) increase benefits over time each period to keep up with living expenses over time.
For Social Security, the Consumer Price Index and average wages for clerical workers determine the percentage of the adjustment to stay on pace with inflation. Your social security benefits can go a long way with automatic changes based on inflation and with smart planning.
The consequences of not planning for inflation
Not considering inflation during retirement planning could be detrimental to your future. Plans without inflation protection will cause your purchasing power to dwindle. Higher prices could reduce the amount of money you can spend on leisure if leisure is still an option.
It can also cause you to spend more on the same necessities you once spent less on. The higher cost of goods could cause you to outlive your retirement funds and force you to return to work.
The role of inflation when saving for retirement
Your saving goal should ensure your retirement income meets your needs and lasts throughout your lifespan. To do that, you must save enough to make up for what you will lose as the cost of living increases. Not planning for inflation while analyzing what you need for savings will cause a gap in your retirement funds.
Ways to plan for inflation in retirement
Based on previous years, you can expect to see a 3 percent inflation rate for retirement. Take a few steps to reverse the damage of inflation and add that chunk of funds back to your purchasing power.
Use a retirement checklist to understand where you are and what you have compared to where you want to be and what you want to have at retirement.
Knowing your situation will help you make a plan and take action. We know how complex planning for inflation can be so whenever you use any of our services, when we give you a snapshot into the future and give you a personalized plan, we plan for inflation for you so you don't have to worry about it.
All of our retirement planning services will give you a snapshot into the future, so you can tackle inflation before you reach your ideal retirement age.
Maximize your Social Security income
Be careful in choosing the right time to retire. Retiring in 30 years instead of 35 will cause you to miss out on getting your full retirement benefits. Delaying retirement to age 70 instead of 62 could add a generous amount to your retirement.
You could earn up to 25 percent more during your retirement years. If you are married, you can also request to get your social security benefits based on the higher earner. Using this strategy for higher earnings at retirement means more to preserve your dollars. More funds mean extra padding to guard against inflation with a system that adjusts your benefits as inflation changes.
Choose investments wisely
Not all investments have a negative result from inflation. Some funds rise as inflation rises. You have options at all risk levels to protect against inflation and increase income at retirement. This method takes patience as you sacrifice potential income now for more growth later.
Real estate, short-term bonds, stocks and even gold are investments used to protect against inflation. Annuities are also an option for growth with inflation protection. Your ideal investment choices depend on other factors in addition to inflation protection, such as risk tolerance. A full analysis will determine what works best to reach your retirement and inflation protection goals.
Get the right insurance coverage
Long-term care insurance is something you might want to consider. It has cost of living adjustment riders in place to protect you from inflation. The benefits increase over time to make sure medical needs are covered when the time comes.