Inflation might be a death sentence for retirees, but it doesn’t have to be for those who take the time to devise a strategy to combat it. Reduced spending, the development of a realistic retirement budget, and the use of leveraged assets can all assist to mitigate the impact of inflation on long-term savings.
When it comes to retirement planning, how do you account for inflation?
Go2Income planning aims to make planning for inflation and all retirement concerns as simple as possible:
- Make a long-term assumption about what level of inflation you’re comfortable with.
- Avoid capital withdrawals by generating dividend and interest income from your personal savings.
- To achieve your inflation-protected income objective, use rollover IRA distributions from a well-diversified portfolio.
- Manage your plan in real time and make changes as needed.
Everyone is concerned about inflation, whether they are retired or about to retire. Create a plan at Go2Income and then tweak it based on your goals and expectations. We’ll work with you to develop a retirement income strategy that accounts for inflation and adjusts for potential retirement risks.
Does the cost of retirement rise with inflation?
The government uses inflation as one of the benchmarks for determining whether or not to increase retirement plan contribution limits and Social Security benefit distributions, and if so, by how much. For example, the 401(k) contribution limit increased by $1,000 from 2021 to 2022, reaching $20,500 ($27,000 if you’re 50 or older). While the IRA contribution ceiling of $6,000 remained unchanged, the income thresholds for contribution eligibility increased.
Cost-of-living adjustments (COLAs) are applied to Social Security and Supplemental Security Income benefits to guarantee that they keep up with inflation, thanks to legislation passed in 1973. Social Security benefits increased by 5.9% for payments beginning in January 2022. So, if a Social Security recipient normally earned $1,000 per month, they may now expect to get roughly $1,059. While it won’t totally compensate for the 7% inflation increase in 2021, it will go a long way.
Why is inflation such a crucial factor in retirement planning?
When it comes to retirement planning, one of the most important aspects to consider is inflation. The cost of living will climb not only while you’re building up assets for retirement, but also during your retirement, which may last 25 years or longer. This, combined with the fact that you will most likely not be earning a paycheck throughout your retirement, is the primary reason your portfolio must preserve some growth potential throughout your retirement.
Consider this: At 3% inflation (about its long-term average as calculated by the Consumer Price Index), the purchasing power of a certain amount of money will be slashed in half in 23 years. Your purchasing power would be cut in half in 18 years if it averaged 4%.
The impact of inflation on retirement income can be illustrated with a simple example. Assuming a 3% annual inflation rate, if $50,000 meets your retirement income needs this year, you’ll need $51,500 the next year to fulfill the same income needs. To equal the purchase power of $50,000 this year in ten years, you’ll need around $67,195. And merely to retain that purchasing power over the next 25 years, you’d need about $105,000! 1
Remember that even a 3% long-term average inflation rate hides periods of exploding prices, such as in the late 1970s and early 1980s, when inflation was in the double digits. Despite the fact that consumer prices have been largely steady in recent decades, there is always the possibility that unforeseen shocks will lead prices to surge again.
So, how do you achieve the returns you’ll need to outperform inflation by a significant margin both before and after retirement? The idea is to allocate at least a portion of your portfolio to growth-oriented investments like stocks. 2
1 This hypothetical application of mathematical principles is provided for educational purposes only and is not intended to reflect the performance of any specific investment. Taxes, fees, costs, and investment returns in general are not included in these statistics.
2 Investing entails risk, including the potential loss of principal, and no investment plan can be guaranteed to be successful.
Why is inflation so detrimental to retirees?
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 keep my retirement funds safe from inflation?
Delaying Social Security benefits can help protect against inflation if you have enough money to retire and are in pretty good health.
Even though Social Security benefits are inflation-protected, postponing will result in a larger, inflation-protected check later.
All of this is subject to change, so make sure you stay up to date on any future changes to Social Security payments.
Buy Real Estate
Real estate ownership is another way to stay up with inflation, if not outperform it! While it is ideal for retirees to have their own home paid off, real estate investing can help to diversify income streams and combat inflation in retirement.
Real Estate Investment Trusts (REITs) are another alternative if you want to avoid buying real rental properties and dealing with tenants or a management business.
Purchase Annuities
Consider investing in an annuity that includes an inflation rider. It’s important to remember that annuities are contracts, not investments.
Rather than being adjusted by inflation, many annuities have pre-determined increments.
There are various rules to be aware of, so read the fine print carefully. Because many annuities are not CPI-indexed, they may not provide adequate inflation protection during your retirement years. ‘ ‘
Consider Safe Investments
Bonds and certificates of deposit are examples of “secure investments.” If you chose these as your anti-inflation weapons, keep in mind that if inflation rates rise, negative returns and a loss of purchasing power may result.
An inflation-adjusted Treasury Inflation Protected Security is a safer choice to consider.
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.
When should you start budgeting for inflation in retirement?
When budgeting for retirement, financial gurus recommend considering a 3% yearly inflation rate. That is, in fact, a greater rate than the government has calculated in recent years.
The Bureau of Labor Statistics calculates the current Consumer Price Index (CPI) by tracking monthly average prices of consumer goods. The CPI is defined as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
The rate of inflation is determined by the change in the CPI from one period to the next.
Because their spending is more oriented on products and services with more rapidly increasing costs particularly health care and housing retirees experience cost-of-living increases that are higher than national averages.
As a result, the government devised the CPI-E, an unpublished, experimental inflation gauge for older Americans. From December 1982 to the present, the CPI-E reflects estimated expenditure habits of Americans aged 62 and up.
From May 2018 to May 2019, consumer prices grew 1.8 percent, according to the Consumer Price Index of the United States Department of Labor.
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.
How can you prepare for a period of high inflation?
As a result, we sought advice from experts on how consumers should approach investing and saving during this period of rising inflation.
Invest wisely in your company’s retirement plan as well as a brokerage account.
What is the most secure investment for your retirement?
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.