Don't Underestimate Inflation in Retirement
Inflation has been tame for so long that it’s easy to ignore when planning for retirement. However, even inflation of 2% or 3% per year, over a period of many years, can seriously erode the purchasing power of your funds. At 2.5% inflation, $1 today will be worth 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. That can have a major impact on those entering retirement for several reasons:
New retirees are less likely to have defined-benefit pensions. Thus, they must rely more on Social Security benefits and personal savings.
While Social Security benefits are still adjusted for inflation based on the Consumer Price Index (CPI), the methodology for calculating the CPI changed dramatically in 1999, reducing increases in the CPI.
Retirees are living longer. As life expectancies increase, retirees are spending more years in retirement, so their retirement savings are subject to the impact of inflation over a longer time period.
Healthcare costs are becoming more of a burden to retirees. More and more companies are reducing benefits or eliminating healthcare insurance for retirees, and healthcare costs tend to increase faster than overall inflation.
To combat the effects of inflation on your retirement income, consider these tips:
Use a conservative inflation rate for planning purposes. Since your retirement is likely to span decades, consider inflation over long time periods.
Consider investment alternatives likely to stay ahead of inflation. Thus, a significant portion of your portfolio would probably be invested in stocks.
Invest in tax-advantaged investment 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 aren’t paying income taxes on earnings throughout the years, that typically means you’ll have a larger balance at retirement than if you were paying taxes throughout the years. Thus, you’ll start out with a larger retirement base to help combat inflation’s effects.
Keep fixed expenses as low as possible. Try to enter retirement with as little debt as possible. If you aren’t using a significant portion of your income to pay a mortgage, car payment, or credit card debts, you’ll have more flexibility to deal with higher prices.
Decide how you will deal with healthcare costs. While Medicare will help once you turn age 65, it still does not cover many healthcare costs. Look into Medigap policies and prescription coverage to help with those non-covered expenditures, especially if your employer does not provide health insurance after retirement.
Minimize withdrawals from your retirement assets, especially during the early years of retirement. To counter inflation, you need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don’t run out of funds late in life, keep withdrawals during the early years to a minimum.
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.
Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. PSEC is not responsible or liable for ancillary products or services offered by Randall Wealth Management Group or this representative. CA Insurance License: #0I08678.
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.