Can Your Retirement Savings Outpace Inflation?

Inflation

Just like longevity risk, or the risk of living longer than expected, inflation can significantly affect your retirement savings. While you are working, inflation is often offset by salary adjustments, such as cost of living increases and performance raises. But in retirement, you don’t have these same gains to account for inflation, making it difficult to maintain the standard of living you desire. Your purchasing power is reduced as goods and services increase in price. How much will you need to compensate for the impact of inflation?

The Reality of Inflation

Just how much of a difference will inflation make on your retirement savings? If you need $5,000 a month to live in today’s dollars, in 30 years you will need $12,136 per month to maintain the same purchasing power, assuming that the annual inflation rate is 3%. Unfortunately, inflation is a moving target. We can look at past inflation data to get an idea of how to estimate future increases, but we can’t predict exactly how much inflation will fluctuate as the years go on. What steps can you take to ensure that your retirement savings will take care of all your needs, despite the threat of inflation?

Factoring Inflation Into Your Planning

The first step to address inflation is to build in realistic estimates of long-term inflation when calculating how much should be saved for retirement. To do this, sophisticated retirement software can apply different inflation rates to various scenarios and expense categories to provide a picture of what may happen. Once you have an idea of what you will need based on these calculations, here are some strategies you can apply to make the results a reality.

Income Streams

An excellent strategy is to create streams of income that have built-in inflation protection. For example, Social Security provides an annual cost of living adjustment, and annuities often offer an option to purchase an inflation increase in benefits. Another idea is to consider long-term care insurance that offers inflation protection.

You could also creatively pursue income streams that grow over time, such as buying into real estate and owning rental property or turning passions and hobbies into an income on the side so that there is a steady stream of money coming in to cushion your savings.

Invest With Inflation in Mind

Certain investments will protect you from inflation more than others. If you invest with inflation in mind, you may want to purchase U.S. government Treasury Inflation-Protected Securities (TIPs) and Series I Treasuries. TIPs can be used to build an inflation-adjusted stream of income, and TIPs and Series I Treasuries can also simply be part of a portfolio that keeps up with inflation.

It is also worthwhile to invest in asset classes that are likely to do well in inflationary times. Research the options of real estate, S&P 500, as well as leveraged loans, among others, to see what protection they offer against inflation.

Consider Withdrawal Rates

Under the safe withdrawal rate research, a 4 or 4.5 percent withdrawal based on the initial portfolio value can have cost of living increases and still be safe for a 30-year retirement period.

Build Contingency Funds

Have a contingency fund that addresses a number of risks in retirement. Note that longevity risk and inflation risk are similar in that if a client lives a long time, he or she will have more exposure to inflation risk as well, meaning that having a single fund to address both risks may be problematic.

Delay Retirement

Another way to manage inflation risk is to shorten the retirement period and reduce the number of years that you are subject to inflation. This can be done by deferring retirement and working longer.

Do you want to see how delaying retirement can offset inflation risks? As Social Security benefits increase up to age 70, a larger percentage of your retirement plan will be inflation protected. Also, if you keep working, your salary will continually be adjusted for cost of living.

If putting off retirement is not an option for you, working part-time during retirement may be another way to offset inflation risk, as wage income is likely to reflect inflationary pressures. Whatever it is you choose to do to while working part-time, you won’t be relying entirely on your retirement portfolio.

Get Creative With Expenses

This tip might seem simple, but it can make a significant impact on how long your savings will last. Examine your retirement expense categories and find ways to lower or eliminate certain costs in retirement. While this can be difficult to predict before you actually retire, it is something to start considering.

There are so many variables involved in retirement planning, and so many factors that may change between now and then. Retirement planning is about preparing as best as you can so that you can aim for peace of mind about your rich future.

Are you taking inflation into account in your planning? What strategies will you employ to protect yourself against this threat? To learn more, download our free report, 12 Keys to a Successful Retirement Strategy today. If you need help, call my office at 770.249.7424 or email me today at beau@richlifeadvisors.com.


About Beau Henderson

Beau Henderson is a financial advisor, author, coach, radio personality, and CEO of RichLife Advisors. He has helped over 3,000 clients to not just improve their relationship with money, but to live the life of their dreams.

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RichLife Advisors, LLC provides investment advisory services through Fiduciary Capital, Inc. Beau Henderson is a licensed life insurance professional in GA, SC, TX, CA, IL, KY, OH, MI, PA, MD, and NY.

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