Why Inflation Is Your Enemy

Everyone knows about inflation, right?  It’s causes the prices of things to go up over time.  When you’re in your working and saving years, this isn’t a huge deal and isn’t always very noticeable.  Why is that?  Because while you’re working, your pay is most likely going up every year, often at a rate greater than inflation.  If you’re saving some of your money for retirement (hopefully you are!), and investing part of that in stocks, then your savings is also growing and compounding to outpace inflation.  But this all changes once you retire and your paycheck stops.


If you’re lucky enough to have a pension (a lifetime paycheck that continues until you die), it most likely will be a fixed amount for the rest of your life.  Over a 24 year retirement, assuming a 3% inflation rate, the cost of everything will double!  If your expenses double, but your pension stays the same, it’s easy to see why you could be in trouble.  If you’re married, I recommend that you take a reduced pension so that your pension will continue to your spouse.  This is especially important if the one who has the pension is male, since women usually outlive men.  This will help protect both of you from running out of money, but it doesn’t help fight off inflation.

Social Security

Social security has a built in cost-of-living adjustment.  This is supposed to offset inflation because its tied to the CPI Index, which is how the government tracks inflation.  Your social security is supposed to go up each year by whatever percent the inflation rate is.  However, there have not always been increases in social security pay.  Also, social security is designed to replace about 40% of your income, so even if you do get an increase each year, it’s not going to be enough to offset inflation completely.


Healthcare has become a huge part of many family’s budgets.  The cost of healthcare is one thing you can guarantee will go up every year!  Medicare expects their costs to go up by 5.3% in 2018, so you can be sure that some of that cost will get passed along to Medicare beneficiaries.  This can happen with higher Medicare monthly premiums, higher medicare supplement premiums, higher co-pays and deductibles, your 20% coinsurance, etc.  Most likely, increases in the cost of healthcare will outpace inflation during your retirement.

Even worse than that, the cost of long-term care has been rising at three times the rate of inflation over that last decade.  Not everyone is going to need long-term care.  But for a person turning 65 today, there’s a 70% chance of needing some type of long-term care services.  This is an area you definitely need to plan for so you don’t derail your retirement, or put your family in a bind.  There are many ways to protect yourself against long-term care costs besides traditional long-term care insurance.  These new tools allow you to access the money for other needs if desired.  Also, if you don’t end up needing long-term care, you don’t lose your money to the insurance company.


There is a very high likelihood that you will not be in a lower tax bracket when you retire.  All signs point to higher tax rates in the future given the situation our country is in.  This is why I recommend trying to shift money to Roth IRA’s while you can.  You’ll have to pay taxes now on IRA money you convert to a Roth, but then it will grow tax free forever.  Also, Roth IRA’s don’t have to be drawn down when you turn 70 1/2 like other IRA’s do.

Taxes are definitely something to consider when you’re choosing where to live during retirement.  Some states like FL, TX, NV, AD, AK, WY, & WA don’t have state income taxes.  Pennsylvania doesn’t have a state tax on retirement account distributions.  That means you don’t have to pay taxes on money you take money out of your IRA or on pension checks you get.  If you do plan to relocate for retirement, do it before you retire.  Moving is expensive, and you’ll need some time to figure out the real cost of living there.  No state income tax is one thing, but states like that usually cost more in other areas like property taxes, sales taxes, etc.

What Else Can You Do?

The best thing you can do to make sure you fight off the inflation enemy is to keep some of your money invested in things that will grow more than inflation over time.  This includes stocks, stock mutual funds, stock ETF’s, and annuities that are indexed to the stock market.   There are a lot of ways to figure out how much money you should keep invested in stocks.  One of the oldest rules of thumb is to subtract your age from 100, and that’s the percentage you should keep in stocks.  I have found for a lot of my clients, this method is too conservative, but it might be right for you.  Everyone is different, that’s why I don’t really like rules of thumb.  The best thing to do is to go through a risk tolerance analysis to see what the right amount of risk is FOR YOU.  Factors like how much lifetime income you already have or will have, where it comes from, and your comfort level with the ups & downs of the market are all important to consider.

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