What threat does inflation pose to your retirement?
As the US economy reopens, we are seeing higher rates of inflation, and this unwanted surge should prompt retirees to consider the threat this could pose to their financial security.
The 5.4% increase in the consumer price index last year marked the highest inflation in almost 13 years. If you remember the double-digit inflation rate boom of the 1970s, you might be worried now. However, even if inflation never reaches these levels again, you still need to consider the eroding effects it has on your long-term nest egg.
How much will your money be worth in 10 or 20 years?
Even moderate inflation can have a significant effect on a retiree’s savings. The Federal Reserve inflation target is 2%, but the Fed has said it will allow inflation to rise above that mark for some time. Let’s take a look at the impact of an average annual inflation rate of 3% over the next 20 years on your finances.
If you needed $ 60,000 for your first year of retirement, 20 years from now you would need $ 108,366.67 to match today’s amount. purchasing power of $ 60,000. Another way of looking at it: at 3% annual inflation, that initial $ 60,000 would only be worth $ 33,220.55 in 20 years.
You need to factor inflation into your retirement plan, as you can expect living expenses, travel, and other expenses to continue to increase. Inflation erodes the value of savings and will continue to do so after you retire. With the near-zero interest rates on savings accounts, retirees who live off their savings are particularly vulnerable to high inflation. Therefore, it is important to evaluate your investment strategy and your retirement income plan to see if you are protected against inflation over the long term.
Social security does not follow
The Senior League believes that the average social security benefit has lost nearly a third of its purchasing power since 2000 because the increase in benefits has not kept pace with the increase in the cost of prescription drugs, food and shelter. This has happened despite annual cost-of-living (COLA) adjustments for Social Security benefits that aim to keep benefit amounts keeping pace with inflation.
Social Security beneficiaries saw a relatively high cost of living adjustment (COLA) of 2.8% in 2018 (for benefit year 2019). In 2020, they experienced an increase of 1.3% (for benefit year 2021). Some years the COLA adjustment was non-existent or practically non-existent. It was 0.3% for 2016 and 0% for 2015. Lawmakers have proposed changing the way COLAs are calculated so that benefit increases better reflect the price increases older Americans see.
Think about what would happen if all of your retirement income lost a third of its value in the past 20 years. Would this scenario increase the likelihood that you would run out of money?
What can you do?
So how do you know how much income you will need in retirement when inflation insists on complicating the situation? Here are a few things to keep in mind:
- First, consider all the sources of fixed income in retirement that are unlikely to keep pace with inflation. In the process, consider how much interest you earn on money in a savings account or CD. We are unlikely to see a substantial rise in interest rates in the next few years, so be prepared to continue earning little interest. It is important to evaluate your investment strategy and your retirement income plan to see if you are protected against inflation over the long term.
- Then calculate how much your nest egg is right now. As you do, factor in inflation over the next 10, 20, and 30 years. Consider that while overall inflation rates may drop from where they are now, this might not be true for some of the specific goods and services that could take up a large chunk of your income, such as energy. , food or health and long-term care. costs.
- Determine if your current investment strategy will need to change after you retire. You may want to consider a strategy that continues to grow your money in retirement, so that when transient events like inflation arise, you are covered. Basically, a solid plan ensures that your purchasing power needs are always met. Some people may need to take less investment risk once they approach and reach retirement. However, having the right allocation of risk assets for your particular situation could help combat the eroding effects of inflation on your nest egg as you retire.
Finally, consult a professional. Today’s retirees face a triple threat of potentially high inflation, persistent low interest rates and an unpredictable market. We could see the aftermath of the pandemic for years to come, so make sure you have a solid retirement plan in place to help you weather storms like rising inflation.
Dan Dunkin contributed to this article.
Solutions First Financial Group is an independent financial services company that uses a variety of investment and insurance products. Investment advisory services offered only by duly registered persons through AE Wealth Management, LLC (AEWM). AEWM and Solutions First Financial Group are not affiliated companies. Investing involves risks, including the potential loss of capital. Any reference to protection benefits or lifetime income usually refers to fixed insurance products, never securities or investment products. The guarantees for insurance and annuity products are backed by the financial strength and claims capacity of the issuing insurance company. Our company is not affiliated with the US government or any government agency. 1021352 – 08/21
Founder, Solutions First, Inc.
Joseph Donti is the founder of Solutions First, Inc. He is an investment advisor and specializes in asset planning and preservation. He has passed his Series 65 exam and holds Arizona Life and Health Licenses. He and his wife, Patty, co-founder of the company, have three children and four grandchildren.
Investment advisory services offered only by duly registered persons through AE Wealth Management, LLC (AEWM). AEWM and Solutions First, Inc. are not affiliated companies.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm to prepare this article for submission to Kiplinger.com. Kiplinger has not been compensated in any way.