Inflation: Retirement’s Silent Killer

I have written two articles recently geared toward retiring successfully. The first was about the benefits of retiring debt-free, meaning why it’s important to eliminate credit card debts, mortgages and auto loans. The second article discussed the importance of factoring in health care costs with your retirement planning. This article focuses on the threat of inflation and how it can affect your retirement nest egg.

Understanding the impact of inflation

Inflation refers to the rise in the cost of goods and services over time. History shows that inflation runs about 3% a year, meaning the cost of living doubles roughly every 24 years. However, we have also experienced inflation as high as 10% (in the late 70s and early 80s, for those of you who remember).

Even a 1% hike over the 3% average rate of inflation is significant in dollars. For example, someone retiring with $40,000 in annual expenses will need about $88,000 in 20 years to cover the same expenses at 4% inflation.

While you are working, your wages tend to keep pace with inflation so it really isn’t a big concern. But when you retire and are living on a fixed income and your retirement savings, inflation has a profound effect on your purchasing power.

Although Social Security is indexed for inflation, typically pensions and fixed annuities are not. If you don’t want to run out of money, it’s crucial to determine how you will pay for rising costs.

Options to address inflation

The following suggestions assume you are relatively debt-free from mortgages, car loans, and unsecured debts as I discuss in “5 Tips to Retire Debt Free”.

Maximize contributions to your retirement plans

The more you save, the more you will have at retirement. This means more money to live the life you dreamed of, while keeping pace with inflation and medical costs.

Factor inflation into your investment strategy

financial_plannersTo protect yourself against inflation, you must earn higher returns on your investments than the rate of inflation. Although this may sound easy, it will take some planning to accomplish.

If you don’t have a financial planner, visit the website for the Financial Planner’s Association. Member planners must offer and provide professional service with integrity, objectivity, competence, fairness, and diligence. The website offers resources, information on a variety of personal finance topics, and tools to connect to a financial planner.



Look beyond your retirement savings for additional income

This may mean finding a part-time job or starting your own business. The idea is to be ready to meet the financial challenges that may arise in retirement, including inflation. After all, making the most of your money is a life-long commitment!

Take action to start saving more money today. Our Financial Counselors at LSS can help you create a realistic budget and provide tangible steps to get you where you want to go. For an appointment, call 888.577.2227 or GET STARTED ONLINE. It’s quick, easy, and just as effective as phone or in-person counseling.

Author Barbara Miller is a Certified Financial Counselor with LSS Financial Counseling and she specializes in Bankruptcy Counseling and Education.

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