Planning for inflation in retirement

Have You Planned for Inflation Risk in Retirement?

What financial risks do you face in retirement? There’s the risk of longevity and potentially outliving your savings. You could also face high health care costs, which can be substantial as you age. You could be worried about investment loss, which could threaten your ability to support a comfortable lifestyle.

But one risk that often flies under the radar is inflation, which is the regular incremental increase in prices on a year-to-year basis. Inflation is driven by many factors, including growth in the economy, increased costs for materials and labor, and much more. It often impacts nearly everything you may buy, from groceries to clothing and health care to energy and more.

In recent years, inflation has been relatively modest. But even modest inflation can have a big impact over time. A price increase of 3 percent, for example, may not sound significant. When that 3 percent is compounded over 24 years, however, it would lead to a doubling of prices.

How would a doubling of your cost of living impact your budget and your financial stability in retirement? Do you have the income and assets to keep up with rising prices?

Fortunately, there are steps you can take to combat inflation and protect your retirement. Below are a few action steps to consider:

1.) Delay Social Security

You will be eligible to file for Social Security retirement benefits as early as age 62. While you might be tempted to file at that time, there are benefits to waiting. Most people reach their full retirement age (FRA) between their 66th and 67th birthdays. If you file for benefits before your FRA, your benefits could be permanently reduced as much as 30 percent.1

On the other hand, you can also wait past your FRA to file, and if you do, you could get an increase in benefits. Social Security offers an 8 percent credit for each year past your FRA that you delay filing. You can delay all the way to age 70, which could give you up to four years of 8 percent credits.2

2.) Invest With Inflation In Mind

You might fear investment loss in retirement. That’s a natural concern to have. If your investments decline in value, you may have to take smaller distributions from your retirement accounts. That could limit your ability to support your desired lifestyle. As a result, you may be tempted to err on the side of being overly conservative in your investment strategy.

Being too risk-averse could create its own dangers, though. You’ll need your assets and income to grow if you want to keep up with inflation and fund a long retirement. Do some research, consult with a financial strategist, and develop a strategy that finds an appropriate balance between risk management and growth potential. Balance potentially risky market-based investments with safer vehicles such as Bank On Yourself, which provides built-in growth to help your savings keep up with inflation.

3.) Look for Ways to Cut Spending

Perhaps the best hedge against inflation is to limit the amount of distributions you take from your retirement accounts. When you take less money in withdrawals, you leave more money in your account. Those funds may then have the opportunity to continue growing and compounding, which could allow you to increase your distributions in the future.

Look for creative ways to reduce your costs in retirement. For example, you could scale back your travel plans, or you could cook more at home. You might consider downsizing to a smaller home to reduce housing costs. You may even consider a part-time job to generate some additional spending money.

Ready to develop a plan to fight inflation in retirement? Contact us today for a free initial strategy session! We can help you create an appropriate strategy to suit your goals for both safety and growth in your retirement plan.

 

1 https://www.ssa.gov/planners/retire/retirechart.html

2 https://www.ssa.gov/planners/retire/1943-delay.html

 

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