Author: Maria Alfano
So you are ready to hang up your towel and set out on a new adventure called retirement. Did you plan accordingly? Are you aware of the direct impact of inflation on your retirement planning?
What is Inflation
Before we proceed you really need to know what inflation is in simple terms.
- Inflation is the rate at which prices go up
- It impacts the cost of living
- Determines the affordability of consumer products and services
- Results from high demand for products and lack of available materials, increased production costs, higher wage rates, and external factors out of our control
- Countries that print money to throw into the economy devalue the money and increase inflation
Is inflation good or bad
Well, to answer this truthfully, it could be both. When trying to slow down a rapidly increasing hot real estate market that inhibits folks from buying a home, then inflation is a good thing.
But, when the average worker (or retiree) cannot afford to put food on the table because eggs went from $1.29 a dozen to almost $3.00 then this is bad.
Minimum wages do not typically go up at the same rate as inflation. And, when living on a fixed pension, this situation becomes more critical. Not to mention that a retired couple, in the USA, needs an average of $365,000 to cover their medical bills.
Direct Impact of Inflation On Your Retirement Planning
So how exactly does inflation impact your retirement?
- Money does not go as far as it used to
- Lifestyle needs to be modified to match your budget
- You may need to work for more years than you planned
- Move/sell your home to make ends meet. Find a cheaper place.
- Forgo some luxuries like cable, cell phone, dining out, travel, and more
Avoid the typical retirement mistakes and really plan for your golden years.
Why is Inflation An Important Aspect of Retirement Planning
People live longer today. A retirement plan that worked when you were 25 is not effective anymore at the age of 65.
The cost of goods, services, rents, and everyday living have doubled if not tripled over the years since you were 25. Long gone are the days when a ride on the local transit was only 25 cents.
Retirement fund growth
While some folks will try to convince you that your fund grows and gains interest over the years, they also forget that inflation caused the market crash in 2008.
So many lost almost all their life savings during that time and their retirement nest egg was gone in the blink of an eye.
Planning for the impact of inflation on your retirement is critical and should be done early in the saving phase. Adjust your goals annually to reflect the rate of inflation.
You will need more than $173K in 2022 for the same buying power as $100K in January of 2000. That is pretty scary for someone who retired in 2000 and is hoping to enjoy life a little while longer (beyond 2022).
You can mitigate these costs early with sound investments.
- Buy a property that will appreciate in value over the years.
- Invest in the stock market with reputable companies that have been around for 20, 30 or even 100 years.
- Have a savings account that you cannot make withdrawals from until you reach a certain age (over and above your IRA, RRSP, or pension funds).
What is the rate of inflation for retirement planning
To stay in the black during your retirement years, financial planners recommend increasing your annual retirement savings by 3%.
This seems quite high since the rate of inflation has been quite stable for many years. Keep in mind that at 25 you were relatively healthy, had good insurance, and rarely needed medical attention.
At 65 and beyond, the medical issues will start to creep up and eat away at your savings fund. And, the cost at the pump, the grocery store, and the movies is so much higher today than it was 40 years ago when you started your retirement saving journey.
In Summary
You are the keeper of your retirement wallet. And, you have the power to make your golden years exciting and fruitful. Don’t let inflation take a big bite out of your spending accounts.
Leave us a comment below and let us know one of your tricks for fighting the inflation impact on retirement planning.