Inflation is a killer

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 more. 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%.  Thatt cost of living adjustment (COLA) would increase the average Social Security benefit by $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. 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. 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. Matt