After retirement, benefits are usually not indexed for inflation. As a result, an increase in the rate of inflation would reduce the worker’s real benefits in the years after retirement, making them less than projected.
How does inflation effect pensions?
To figure out how inflation will affect seniors, use the “Rule of 72,” according to Thomas Blackburn, a Certified Financial Planner with Mason & Associates. This calculator calculates how long something will take to double in value. For example, if an item costs $100 today and inflation is 2%, the item will double in price to $200 in 36 years (after dividing 72 by 2). It would take around ten years to double if inflation was 7%.
The provision also applies to a pension that does not include a cost-of-living adjustment. If inflation is 7%, your money will be worth half as much in ten years – a $50,000 pension now will be worth $25,000 in ten years.
Are pensions inflation-indexed?
Ad hoc raises aren’t tied to a price index; instead, retirees’ current pensions are normally increased by a percentage of their current benefit, which is usually a fixed sum. For example, pension plan managers may elect to give all annuity recipients a 3% raise.