The economy seems to be going through one of those phases when everyone is worried about inflation and recession. And if you are close to retirement, you’re probably wondering, “does inflation have any type of impact on retirement income” or “how does this affect me?” We’ll answer both these questions in this article. Inflation is a powerful concept, and if you don’t take steps to protect yourself now, it can reduce your purchasing power significantly in the future.
The effect on inflation on your income
Between 2009 and today, the US$ has lost 20% of its purchasing power. So, if you could buy something for $1 thirteen years ago, you’d need $1.20+ to buy it now. What this means in essence is, unless your income has grown with inflation, you’re one-fifth poorer now than you were in 2009. And $45K at the time is worth less than $36K today.
To curb this, you need to factor inflation into your retirement savings, especially given the current financial climate and how quickly things are getting costlier. If you want your money to last through your post-work years, it’s important to build up sources of income that grow with inflation. While Social Security and pension plans belong to this category, you’ll need more to protect your nest egg.
Inflation and Social Security
In addition to any savings and investments, you should draw benefits from Social Security. As a matter of fact, 79% of US retirees get some income from the government. Now, during periods with high inflation, the dollar loses value – meaning you spend more on food, gas, and household essentials. In recognition of this, the government uses price indexes to evaluate Social Security benefits every year.
Subsequently, a cost of living adjustment is done to increase how much retirees earn to meet up with their rising expenses. But research shows that it’s not nearly enough. Since 2000, the cost of goods and services bought by people of retirement age has increased by 99% WHILE their benefits have only seen an upward review of 53%.
Can pension funds lose value over time?
Another key source of post-work income is pensions, and 68% of retirees over the age of 65 get some money from it. Here’s the issue though: your pension benefits are calculated based on your pay during the last 3 to 5 years of work. So, if inflation rises significantly during those last years and before your salary gets adjusted, you’re left at a disadvantage. The same thing applies if inflation rises rapidly just after you retire.
75% of pension plans from state and local governments get adjusted based on changes in the cost of living. And just as with Social Security, the adjustment is not enough, but at least, it’s something. However, the same is not true for private funds, and you may find that your income is severely affected if you depend on them for post-work upkeep and healthcare expenses.
How to protect your retirement savings from inflation
The best way to hedge against inflation is to build up multiple streams of income in preparation for the years when you would no longer be able to work. Most importantly, some of these sources must increase alongside rising costs of goods to ensure your earning isn’t stagnant while everything else gets more expensive. Aside from diversifying your income, you may also add inflation-adjusted investments to your retirement portfolio. Common examples of these include energy stocks, gold, commodities, and real estate investment trust (REIT).
If you’d like to learn more about protecting your present and future earnings from inflation, our in-house investment specialist may be available to discuss with you. This is a short consultation that comes at NO CHARGE to you, and you can book an appointment by following this link.
