Inflation: A Retirees Biggest Enemy

Most people don’t think of inflation as being their biggest enemy.  But reality shows that especially for retirees, rising costs of living can be the most devestating thing there is.  In 1981, a gallon of gas cost $1.35, about a third of what it costs today.  And the cost of an average home at that time was about what many people pay for a new car today.  Inflation is very real, but because it happens so gradually, we don’t really notice it that much.  So the question is, what are you doing to protect yourself from it?

The problem is that inflation eats away at the purchasing power of retirement nest eggs.  Over the course of 30 years (a very likely retirement period these days), a 3.5% inflation rate will cause today’s dollar to buy about 36 cents worth of goods.  To look at it another way, someone who can live today on $50,000 a year would need about $140,000 a year 30 years from now (if inflation holds at that pace).

Lately, the Consumer Price Index (CPI), the most common measure of inflation in this country, rose to 3.6% annually in July.  That’s above the historical average, and worries many experts that it could discourage the Fed from too much more stimulus for the economy.

With no cost of living increases in Social Security checks over the last two years, many retirees are beginning to feel the pinch of what rising costs can do to someone on a fixed income.

The truth is, the CPI measurement of inflation may not be realistic for some people.  People in retirement years often spend more than average on healthcare.  The cost of medical care only accounts for 6.6% of the CPI index.  At the beginning of retirement, healthcare accounts for about 25% of your essential expenses, and near the end of retirement if can account for almost 50% of your essential expenses.  As you get into the later years of retirement you tend to spend less on other things like travel, entertainment, transportation & clothing, so you still need to plan on at least a 3% overall inflation rate.

The good news is, there are ways to hedge your portfolio against the inflation enemy.  Things like stocks, real estate and commodities have historically outperformed inflation.  More recently, inflation protected bonds have also helped investors stay ahead of rising costs.  Many fixed and variable annuities now offer riders that automatically boost income payouts to policyholders each year.

The bottom line is, you need to plan on doubling or tripling your income over a 30 year retirement, even with modest inflationary numbers.  This can definitely be done with some careful planning, and by using a diversified approach to allocating your nest egg.  Working with a competent financial planner will help you accomplish this.

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