While there are many potential risks to consider when planning for retirement, one that is often overlooked is inflation. Most people factor in inflation when planning how much they will need when they reach retirement. But inflation does not stop the day you retire. In fact, your budget on the day you retire could look very different five, 10 or 20 years into retirement. Not understanding inflation — and more importantly — not having a plan to address it, can derail even the most well-planned retirement strategies.
Based on life expectancy tables, someone retiring today at age 65 could expect to live another 20 years or so. So even with a modest 3% inflation rate, day-to-day costs of living could double after about 24 years, based on consumer price index and Bureau of Labor Statistics data. And at the current rate, health care costs, which play an increasingly important role as we all age, will likely rise at an even greater pace.
Also consider Social Security payments. For 2020, the Social Security Administration raised benefits by 1.6%. That cost of living adjustment (COLA) would increase the average Social Security benefit by just $24 per month. That certainly doesn’t go very far when you factor in the costs a typical retiree is paying each month for housing, transportation, prescriptions, other medical expenses and more. Most recipients will likely not see an increase due to the increase in Medicare costs.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The bottom line is that you need a plan to address rising costs across all of your sources of income, and help make sure your retirement income keeps pace, while also ensuring your money will last through a long retirement. Here are a few strategies you can explore today to help you manage inflation in the future.
Estimate how many years you may be retired, and what your potential income should be
It’s important to set realistic expectations for both how long you may be in retirement, and how much income you’ll need. Of course, there are no guarantees, but those of you in good health who have a history of longevity in the family may be looking at a very long retirement (think 30 years!). You’ll need to help ensure you have the funds to cover not only day-to-day things, but also unexpected costs like major medical expenses.
Building out a realistic budget that takes into account essential, discretionary and unexpected costs is a smart first step. With that as a start, you can review the ways high inflation and low interest rates may affect total rates of return, and your income, during retirement. It might be different than you anticipated. A financial adviser can help you chart your year-to-year needs and how they can change as you get further along into retirement.
Think through retirement income strategy
Some people try to address inflation in their retirement income strategy on their own. This might look like withdrawing no more that 4% of an asset, and then increasing the withdrawal by the rate of inflation each year to help address rising costs. But as those withdrawals grow, they could represent a large piece of your retirement account over time. This can seriously erode funds, and you could face either living with less income, or the reality of running out of money.
Proactively, you can also work to save more during your working years, keeping in mind that you will need to give yourself that annual increase in retirement to help address inflation.
Guaranteed sources of income, like annuities, can sometimes be a good solution to help ensure you have money that can last throughout retirement. Some annuities can offer increasing income opportunities through various benefits or income riders, which are benefits that provide monthly payments for life to the policyholder for an additional charge.
There are some fixed index annuities, and even now index variable annuities, that actually offer potential income increases every year to help address the effects of inflation. These annual increases are available by purchasing optional riders that may be available for an additional charge. You could also consider long-term care insurance policies or an insurance policy or annuity that offers riders to help supplement the rising costs of health care.
Managing costs in retirement
As you think through your future expenses and how inflation may impact them, it’s important to manage expectations, be realistic, and to focus on what you can control. Working with a financial professional, you can see what products and solutions can help address longevity, the risk of inflation, and rising health care costs in retirement.
We all want to have a long and comfortable retirement. By creating an income strategy that seeks to address the rising cost of living and health care, you can head into retirement more prepared.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Products are issued by Allianz Life Insurance Company of North America.
-
Does Donald Trump Claim Social Security Benefits?Social Security is a hot topic. I thought it would be interesting to see which presidents since 1983 claimed their benefits.
-
An Estate Planning Attorney's Guide to the Importance of POAsRegularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
An Estate Planning Attorney's Guide to the Importance of POAs
Regularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax BombYour home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing EnforcementSignificant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's HowCombining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
-
Here's Why You Shouldn't Do an Estate Plan Without a Financial PlannerEstate planning isn't just about distributing assets. Working with a financial adviser can ensure you've considered the big picture — and the finer details.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a StrategyLike presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.
-
Is a Family Office Right for You? The Multimillion-Dollar QuestionAs ultra-high-net-worth individuals increase in number, many are turning to family offices to manage their complex finances. Here's how family offices work, courtesy of a finance professional.
-
If You're Ignoring Private Markets, You're Missing Most of the ActionPrivate markets are becoming increasingly essential for all investors, not just institutions, and they are now more easily accessible thanks to innovative investment structures.
