How To Keep Up With Inflation in Retirement

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Inflation Calculator For Retirement Savings

Over time, inflation can have a severe impact on the purchasing power of your savings. Using this inflation calculator, you can estimate how much your money will be worth. Just enter the amount of money you have saved and the inflation and tax rates you expect to see over time. The calculator will then estimate how much your money will be worth in today’s dollars. This can be a helpful tool for determining how much you need to save to maintain your current standard of living. In addition, the calculator can also be used to compare the relative value of different investments.

For example, if you are considering saving for retirement, you can use the calculator to determine whether a traditional savings account or a Roth IRA is likely to provide more value over time.

How Does Inflation Affect Purchasing Power?

Inflation means that prices for things are going up, and because of that, the money you have buys less than before. This is a big deal, especially for people who don’t earn more money over time, like those who have retired.

There are two main reasons why prices go up:

  • Demand-pull inflation: This happens when more people want to buy things, and the sellers increase prices because a lot of buyers are competing for the same items.
  • Cost-push inflation: This happens when it costs more for companies to make things (because workers’ pay goes up or materials are more expensive). So, the companies increase prices to keep making a profit.

Looking back over the years, prices in the United States have usually gone up by about 2-3% per year. But there were times, like in the 1970s and early 1980s, when prices went up really fast, even by 13.5% in a year. That’s a lot compared to what we’re used to.

Key Takeaways

  • Understanding Inflation’s Impact: Inflation erodes the purchasing power of money, affecting retirees by increasing the costs of goods and services over time. For instance, with a 3% annual inflation rate, the cost of goods that initially cost $100 would rise to $209 in 25 years. This increase significantly impacts retirees’ standard of living, emphasizing the need for a retirement plan that accounts for inflation.
  • Measuring Inflation: The Consumer Price Index (CPI) is a reliable measure for tracking inflation. The document suggests adding a margin of 1% or more to the CPI to estimate a personal inflation rate, providing a range of 3.5-5% for long-term planning. However, it also notes the unpredictability of inflation and recommends regular reviews with a financial professional.
  • Inflation and Investments: Inflation doesn’t just affect daily expenses; it also impacts investment returns, particularly fixed investments. To grow in value, investments must outperform inflation. Historically, equity and bond investments have achieved this. The document highlights the importance of a diversified investment portfolio to combat inflation.
  • Strategies Against Inflation:
    • Planning: Prepare for various scenarios using both conservative and aggressive inflation rates. Adjust retirement income assumptions based on actual inflation rates.
    • Saving: Enhance savings and investments to meet worst-case inflation scenarios, considering future taxes and investment allocation between taxable, tax-deferred, and tax-advantaged programs.
    • Retirement Income: Incorporate an inflation assumption in income needs, understand spending habits, consider equity investments to outpace inflation, and develop tax strategies to retain more earnings.
Inflation And Retirement

The Impact of Inflation on Retirement

Inflation can have a significant impact on retirement savings. The rising cost of living means that retirees need to spend more money to maintain their standard of living. If retirement savings are not growing at a rate that exceeds inflation, retirees may find themselves in a precarious financial situation.

The Power of Compounding

Compounding is the process of earning interest on interest. Over time, this can lead to significant growth in retirement savings. However, if the rate of return is not keeping up with inflation, the purchasing power of retirement savings can be eroded.

Longevity Risk

Longevity risk refers to the risk of outliving your retirement savings. With life expectancies increasing, retirees must plan for a more extended retirement period. However, if retirement savings are not growing at a rate that exceeds inflation, retirees may run out of money later in life.

Annuities with Increasing Lifetime Income Riders

An annuity is a financial product that provides a guaranteed income stream for a fixed period or life. Annuities with increasing lifetime income riders are a type of annuity that provides a guaranteed income stream that increases over time to keep up with inflation.

How Annuities with Increasing Lifetime Income Riders Work

Annuities with increasing lifetime income riders provide a guaranteed income stream that increases over time to keep up with inflation. The income stream can start immediately or be deferred until a later date. The income stream amount depends on the initial investment, the annuitant’s age, and the deferral period’s length.

Benefits of Annuities with Increasing Lifetime Income Riders

Annuities with increasing lifetime income riders have several benefits, including:

Inflation Annuity

Choosing The Right Annuity For Inflation

Choosing the right annuity can be a complex decision, especially when considering the impact of inflation. Inflation can erode the purchasing power of retirement savings over time, making choosing an annuity that protects against inflation essential. In this guide, we will discuss how to choose the right annuity for inflation, including factors to consider and strategies to minimize the impact of inflation on retirement savings.

 Understanding Inflation and Its Impact on Annuities

Inflation is the rate at which the general level of prices for goods and services in an economy is rising. Annuities are designed to provide a guaranteed income stream for a fixed period or for life, but inflation can erode the purchasing power of that income over time. Therefore, choosing an annuity with protection against inflation is essential to ensure that the income stream maintains its value over time.

Types of Annuities That Offer Inflation Protection

Not all annuities offer protection against inflation. Two types of annuities that offer inflation protection are:

  • Fixed Indexed Annuities – These annuities offer a guaranteed minimum rate of return and potential for additional interest based on the performance of an underlying index. Some fixed-indexed annuities offer inflation protection by including a rider that adjusts the income stream for inflation. As a result, the income increases and never decreases.
  • Immediate Annuities with Cost-of-Living Adjustments (COLAs)Immediate annuities provide a guaranteed income stream that starts immediately after purchase. An immediate annuity with a COLA rider will adjust the income stream for inflation over time.

How Inflation Impacts Annuity Income Streams

Inflation can have a significant impact on annuity income streams over time. An income stream that does not increase to keep up with inflation will lose its purchasing power, meaning the same income will buy fewer goods and services over time. This can be especially problematic for retirees living on a fixed income.

Factors to Consider When Choosing An Annuity

When choosing an annuity with an increasing lifetime income rider, it is essential to consider several factors, including:

  • Financial stability of the insurance company
  • Fees and charges associated with the annuity
  • Interest rates and potential for growth
  • The flexibility of the income stream
  • Surrender charges and withdrawal restrictions

Other Strategies to Keep Up with Inflation in Retirement

In addition to annuities with increasing lifetime income riders, there are other strategies that retirees can use to keep up with inflation in retirement.

Investing in Inflation-Protected Securities

Inflation-protected securities are a type of bond that protects against inflation. The interest rate on these securities is adjusted to keep up with inflation, ensuring that the purchasing power of the investment is maintained.

Creating a Retirement Income Plan

Creating a retirement income plan that considers inflation, longevity risk, and other factors can help retirees stay on track financially. A retirement income plan should include a budget, a plan for withdrawing retirement savings, and a strategy for maximizing Social Security benefits.

Next Steps

Inflation can significantly impact retirement savings, but annuities with increasing lifetime income riders can help retirees maintain their standard of living. When choosing an annuity, it is essential to consider factors such as financial stability, fees, and flexibility of the income stream. In addition to annuities, retirees can invest in inflation-protected securities and create a retirement income plan to stay on track financially. Retirees can enjoy a comfortable and secure retirement by taking proactive steps to keep up with inflation.

Contact our team today to learn more about addressing these risks head-on. We would be happy to discuss your specific needs and provide a quote for a plan that will give you peace of mind in your golden years.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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