If you aren’t careful, inflation can eat into your retirement savings. As the American economy reopens, we’re witnessing increased inflation rates, which should cause retirees to think about the threat this poses to their financial stability.
The consumer price index increased by 5.4 percent last year, the highest level in over 13 years. You may be concerned now if you recall the 1970s’ skyrocketing double-digit inflation rates. Even if inflation never returns to those levels, you must consider the long-term effects on your savings.
In ten or twenty years, what will your money be worth?
Even minor increases in inflation can have a significant impact on a retiree’s savings. The Federal Reserve’s target inflation rate is 2%, but it has stated that it will allow inflation to grow above this level for some time. Consider how a 3% annual inflation rate would affect your money over the next 20 years.
To replicate today’s purchasing power of $60,000, you’d need $108,366.67 in 20 years. Another way to look at it is that $60,000 today would be worth only $33,220.55 after 20 years if inflation is 3% per year.
Because you may expect the cost of everyday things, travel, and other expenses to continue to climb, you should consider inflation in your retirement planning. Inflation eats away at the value of your investments and will do so even after you retire. Since savings accounts pay near-zero returns, retirees who rely solely on their assets are exposed to excessive inflation. As a result, it’s critical to evaluate your long-term investing strategy and retirement saving plan to see if you’re shielded from inflation.
The Social Security System Isn’t Up to Date
Because Social Security benefit increases have not kept up with the rising cost of prescription drugs, food, and housing, the Senior Citizens League estimates that the typical Social Security payment has lost approximately a third of its purchasing power since 2000.
This happened despite annual cost-of-living adjustments (COLAs) for Social Security benefits, which should keep benefit levels up to date with inflation.
In 2018, the cost-of-living adjustment (COLA) for Social Security recipients was 2.8%, which was quite high (for the 2019 benefit year). A 1.3% gain was the COLA rate in 2020 (for the 2021 benefit year). COLA has been absent or nearly absent for several years. In 2016, it was 0.3%, whereas in 2015, it was 0%. Changes to the way COLAs are computed have been proposed by lawmakers to better represent price increases experienced by older Americans.
Consider what would happen if you lost a third of your retirement income in 20 years. Is it more likely that you’ll run out of money?
What Options Are Available To You?
So, how can you figure out how much money you’ll need in retirement when inflation keeps adding to the mix? Here are a few pointers to remember:
To begin, think about any retirement income sources that are unlikely to keep up with inflation.
Consider how much money you have in a savings account or a CD is making in interest during this time. In the coming years, it’s unlikely that we’ll see a significant increase in interest rates, so plan on earning very little. It’s critical to evaluate your long-term investing strategy and retirement income plan to see if you’re shielded from inflation.
Next, figure out how much money you have in your savings account at the moment.
Consider inflation over the next 10, 20, and 30 years as you do so. Consider that, while overall inflation rates may reduce from their current levels, this may not be the case for some of the individual commodities and services that could consume a significant portion of your income, such as energy, food, or healthcare and long-term care expenditures.
Consider whether you’ll need to change your existing investment strategy once you’ve retired.
You might want to consider a retirement strategy that allows you to continue to grow your money so that you’re protected from unforeseen events like inflation. A good plan ensures that your purchasing power requirements are met consistently. As you approach and attain retirement, you may need to take on less investing risk. Having the correct risk asset allocations for your scenario could help you counteract the eroding impacts of inflation on your retirement savings.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
