Don't Forget about Inflation
Inflation has been tame for so long, it’s easy to forget how much it can affect your purchasing power over a long retirement. Over the past 10 years, inflation, as measured by the consumer price index, has averaged 1.8% (Source: Stocks, Bonds, Bills, and Inflation Yearbook, 2017). At 1.8% inflation, $1 is worth 84¢ after 10 years, 70¢ after 20 years, and 59¢ after 30 years. Thus, you need to look for strategies to lessen inflation’s impact:
Use a conservative inflation rate when planning for retirement. When calculating how much to accumulate by retirement age and how much to withdraw during retirement, use a conservative inflation rate.
Determine how much of your retirement income is indexed for inflation. Social Security benefits are currently indexed for inflation, although that could change in the future. Most defined-benefit pension plans do not make adjustments for inflation. Thus, other income sources will have to fill an increasing income gap over time.
Invest in tax-advantaged retirement vehicles. Look into 401(k) plans, individual retirement accounts, and other retirement vehicles. While each has different rules for taxing contributions and earnings, all provide some tax-free or tax-deferred benefits. Since you won’t be paying income taxes on those earnings, that typically means you’ll have a larger balance at retirement.
Choose investments carefully. Your after-tax rate of return should be higher than the inflation rate. Review your investments annually to make sure you aren’t losing purchasing power.
Be prepared for change. After retirement, keep a close eye on your investments. If inflation increases and you are concerned that increasing withdrawals may deplete your investments, you may want to look for ways to reduce your living expenses or go back to work at least part-time.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.