Inflation hasn’t always been top-of-mind when it comes to retirement planning, especially over the last four decades when inflation was relatively low. Regardless of the current rate, it’s essential to account for how inflation may increase the costs of goods and services throughout your retirement years.
When evaluating your current lifestyle expenses and envisioning your retirement needs, consider how rising costs could affect your purchasing power. Inflation reduces the value of your savings by increasing expenses for the services and necessities retirees and pre-retirees depend on.
In other words, high inflation can erode your retirement savings.
None of us can predict the future, but we can plan. Given that Americans are spending 20-30 years in retirement, it’s critical to include inflation risk in your overall planning.
Public Policy
An issue we have to contend with when it comes to inflation is actions or non-actions by banks and the Federal Reserve. Even though interest rates have been raised by the Fed multiple times in the last few years, safer government-backed investments like money market funds, CDs and government bonds are still generating very low yields, not keeping pace with the cost of goods and services that many of us need. This makes it difficult for our safer money investments to keep pace with our expenses.
Inflation also has an impact on Social Security benefits. Among the features of Social Security is that benefits can be adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. But sometimes there is a very minor increase given, which doesn’t cover actual increased costs.
Getting the most out of your Social Security benefit is extremely important for your retirement, and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, and that’s why retirement planning is important.
Health Care and Medical Cost Inflation
Then there is health care, among the biggest costs you may encounter in retirement, and even now if you are still working and saving for retirement. Medical inflation often outpaces general inflation, posing a significant risk to your savings if unaddressed.
Expenses such as premiums, co-pays, deductibles, and uncovered services can add up quickly. It’s important to prepare not only for routine health care costs but also for potential long-term care needs, which typically are not covered by Medicare.
Planning Is Key
Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. There are several ways we can address inflation risk, depending on your situation. Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. Make sure to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk.
Let’s discuss your retirement plan, including a plan to address inflation.
