Inflation reduces the purchasing power of retirees. The impact of inflation on retirees’ purchasing power is their top concern. Even if inflation remains low, this is true because seniors are more likely than younger consumers to spend money on items that are subject to price increases, such as healthcare.
How can I safeguard my retirement funds against inflation?
If you wish to beat inflation, the average inflation rate is the minimum criterion to meet. Your savings vehicle must outperform inflation in order to sustain and increase in value.
Retirement plans that ignore inflation and declining purchasing power risk becoming obsolete as time passes.
Online calculators that account for inflation, such as this one, might be handy tools if you’re just starting started with retirement income planning.
Getting advice from a financial specialist can also help you support and battle-test your retirement plans.
Here are six ideas to help you safeguard your retirement income plan and beat inflation:
Keep Working
If you work into your retirement years, you will receive a wage and benefits that will increase in line with inflation.
Because your retirement income and future benefits may be based on a greater aggregate final wage due to a few extra years of employment, this can safeguard you financially in later retirement years.
Stay Invested in Stocks
Investing in equities after retirement, or staying invested, can help your retirement savings keep up with inflation.
Although there is no guarantee that your stocks will outperform inflation, safe stocks have historically fared well over time.
While switching to a more conservative portfolio may appear to be the safest option, diversifying your portfolio with a variety of investments is the best way to safeguard your portfolio from inflation.
Is inflation a factor in 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.
With inflation, how much will I need for retirement?
Inflation has a significant impact on purchasing power. For example, if your current annual income is $50,000 and you assume a 4.0 percent inflation rate, you’ll need $162,170 in 30 years to maintain the same quality of life!
Use this calculator to figure out how inflation will affect any future retirement demands you may have.
What impact does inflation have on my 401k?
Your retirement account’s investments aren’t adjusted for inflation. This means that inflation reduces your 401(k) investment returns over time. How? Annual inflation for all products was 1.7 percent in February 2021. 4 If you had a 2% return on investment over the same time period, you’d only have a net gain of 0.3 percent in purchasing power because inflation eroded your entire earnings.
What is the safest investment for your retirement funds?
Although no investment is completely risk-free, there are five that are considered the safest to own (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities). FDIC-insured bank savings accounts and CDs are common. Treasury securities are notes backed by the government.
How will you protect yourself from inflation in 2022?
During inflationary periods, stocks are often a safe refuge. This is because stocks have typically produced total returns that have outperformed inflation. And certain stocks outperform others when it comes to combating inflation. Many recommended lists for 2022 include small-cap, dividend growth, consumer products, financial, energy, and emerging markets stocks. Industries that are recovering from the pandemic, such as tourism, leisure, and hospitality, are also receiving a thumbs up.
Another tried-and-true inflation hedge is real estate. For the year 2022, residential real estate is considered as a safe haven. Building supplies and home construction are likewise being advocated as inflation-busters. REITs, or publicly traded organizations that own real estate or mortgages, provide a means to invest in real estate without actually purchasing properties.
Commodity investments could be one of the most effective inflation hedges. Agriculture products and raw resources can be exchanged like securities. Gold, oil, natural gas, grain, meat, and coffee are just a few of the commodities that traders buy and sell. Using futures contracts and exchange-traded funds, investors can allocate a portion of their portfolios towards commodities.
During inflationary periods, bonds are often unpopular investments since the return does not keep pace with the loss of purchasing power. Treasury inflation-protected securities are a common exception (TIPS). As the CPI rises, the value of these government-backed bonds rises, removing the danger of inflation.
TIPS prices rose dramatically in tandem with inflation expectations in 2021. To put it another way, these inflation hedges are no longer as appealing as they were a year ago. Savings bonds, which the US Treasury offers directly to investors, are attracting some inflation-avoiders.
Inflation favours whom?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
With inflation, is a Roth IRA worthwhile?
The impact of inflation is one issue that many individuals ignore when estimating their retirement number. In its most basic form, inflation means that the average price of everything rises over time. Inflation causes the cost of housing, groceries, electricity, petrol, insurance, and other items to rise over time.
Cost hikes start to eat into how much you can actually buy with your savings over time. You may have a lot of money set up for retirement, but if prices continue to rise, the amount of items you can buy with it becomes increasingly limited.
It’s crucial to remember that inflation has a significant influence on both regular retirees and those in the FIRE movement who are looking to retire early. It’s especially critical for folks who use hybrid methods like coasting.
How inflation affects retirement
Let’s begin with the fundamentals. Inflation is defined as a rise in prices over time. The Consumer Price Index, which has indicated an increase in overall prices of little more than 2% per year over the past decade, is the “official” indicator of inflation in the United States.
What about once you’ve retired? Although it’s impossible to predict how much a typical retirement portfolio will increase in value in the future, Goldman Sachs analysts predict a 6% average return over the next ten years.
How much money can retirees lose to inflation?
One helpful way to think about inflation in terms of retirement is to consider it as a hidden cost that you must pay every year, regardless of where you live. It’s not reflected in your bank statements, but rather in what you may buy with your money.
Consider the following scenario: in 2010, you have $100,000 in your retirement account. Your account balance would be around $179,084 by 2020, if it increased in value at a rate of 6% each year. However, if inflation is at 2%, you’ll be paying a “hidden fee” of $57,185 over ten years. As a result, your purchasing power decreases.
In other words, if you keep to the above-mentioned 6% average annual return estimate and inflation stays around 2%, you’ll lose more than half of your gains each year due to inflation.
ways to avoid losing retirement savings to inflation
What can you do to reduce the impact of inflation’s “hidden cost” on your retirement savings? Here are five items that may be of assistance.
Use tax-advantaged retirement vehicles
While retirement plans such as Roth IRAs and 401(k)s do not directly combat inflation, they can help mitigate the impact of inflation when you take funds by lowering your tax burden on the money you earn within the account. This is especially true when it comes to Roth accounts.
When you put money into a Roth IRA and then withdraw it when you retire, you don’t have to pay any income taxes on the money you’ve earned.
You can still save money on taxes with a regular company 401(k), but only to a certain extent. Your contributions to those accounts are tax-free today, lowering your tax burden right now, but you’ll have to pay taxes on all withdrawals from those accounts afterwards. Because you’ll be earning less in retirement, your tax rate will presumably be lower, and you’ll pay fewer taxes.
Of course, this has no effect on inflation, but it does mean that you will pay less tax on your retirement funds than if you used a traditional investing account.
Invest some of your savings in the stock market.
Being more active with your investments in things that offer a higher average yearly rate of return than inflation is a wonderful method to protect yourself against inflation over time. Investments with a higher average annual rate of return fluctuate a lot year to year, but they average out to a nice level over time.
A good example is the stock market. Stock investing is extremely volatile, which means you’ll have years like 2008 where 40% of the stock market’s value goes, but you’ll also have years with returns of well over 10% per year. That’s why stocks work in the long run you’ll have a few terrible years, but the sheer amount of good years will more than compensate.
If you’re close to retirement or have more than ten years’ worth of living expenses in your retirement accounts, consider putting a significant share of equities in your portfolio.
Avoid long-term investments with a low rate of return
More conservative investors may prefer to invest in low-volatility assets that keep their value without exposing them to significant danger of loss. The difficulty with these investments is that they provide little return when interest rates are low, as they are now, and even when interest rates are high, they are frequently accompanied by rising inflation.
If you want to use these types of investments to make your portfolio safer, go ahead and do so, but don’t lock your money into long-term investments of this type while interest rates are still low; otherwise, if interest rates and inflation rise, your investments will lag far behind inflation in the future.
Buy inflation-protected securities
If you want your money to be as safe as possible while still keeping up with inflation, another option is to invest in Treasury Inflation-Protected Securities, or TIPS. These investments are backed by the government, and their face value rises in line with inflation over time.
What’s the catch, exactly? TIPS are frequently subjected to a set negative interest rate, which is common during periods of extremely low interest rates. On an investment like this, how does a negative interest rate work? When interest is calculated, it is removed from the investment’s face value. TIPS will keep up with inflation in theory, but in practice it only keeps up with inflation minus 0.5 percent or so during periods of extremely cheap interest. You’ll still lose money due to inflation, but it’ll be a tiny and consistent amount.
Buy real estate
Finally, consider investing your money in something that has historically risen at a pace slightly faster than inflation, such as real estate. Real estate, especially for early retirement, can be a powerful vehicle for retirement investing.
Why does real estate usually (though not always) outperform inflation? First, because housing expenses are a component of inflation, the cost of real estate is factored into the calculation. Second, real estate is a fixed object there won’t be any more land created overnight thus as more people are born and seek more property, the value rises. It’s a case of supply and demand, and additional supply will never be available.
It’s important to remember that real estate, like equities, has volatility, which means that some years the value will rise significantly faster than inflation, while other years the value may fall or grow at a slower rate. You’re investing in real estate for the long haul, so those years will add up.