How To Keep Up With Inflation in Retirement

Shawn Plummer

CEO, The Annuity Expert

This guide will teach you how to keep up with inflation in retirement to maintain your lifestyle for the rest of your life. This guide is perfect for retirees wanting to increase their income year after year throughout their lifetime.

When Ford introduced the Mustang in 1964, the sticker price was $2,368. You could get the convertible model for just a few more dollars, $2,814.

Today, a Ford Mustang would set you back $26,670; a convertible, $32,170. So you can quickly spend over $73,000 for a top-of-the-line Mustang.

Why does it cost so much more today than in 1964?


What is Inflation Risk?

Simply put, inflation is the increase in the price of the goods and services we purchase and consume. The average inflation rate over the past 30 years is 3.22%.

We see it in everyday things such as groceries and things that we may only buy a few times in our lives, like houses. Inflation is everywhere and can impact everything, but what causes inflation, and why should we worry about it?

Several things can cause inflation:

  • Government policy,
  • Scarcity of resources, and
  • Increased demand for certain goods

For example, let’s say that everyone wants to buy the latest Ford Mustang. Not expecting the latest Mustang would be so popular, Ford didn’t increase the number of Mustangs it built. But some people want a Mustang so badly that they are willing to pay more than others to own a Mustang.

As a result, Ford Mustangs’ price increases as more people are willing to pay more to own one. Suddenly, you have inflation. That’s just one example and a pretty simple one.

How Inflation Can Impact Your Retirement

To see how inflation can impact your retirement, consider siblings Bill and Jill. Both Bill and Jill are retired and live a comfortable lifestyle.

Bill’s retirement income is fixed at $50,000 a year. Meanwhile, Jill has the same $50,000 yearly in retirement income, but her retirement income strategy adjusts yearly for inflation.

If we assume that inflation is a constant 3% a year in retirement, it doesn’t take long to start seeing changes in Bill and Jill’s standard of living.

After just five years, Jill can purchase the same number of goods and services as before. However, Bill has already started to make adjustments. His purchasing power has decreased by 14%. After ten years, Jill is still looking good, but Bill’s purchasing power has eroded by 25%.

Fast forward 20 years.

Jill still lives the same lifestyle, while Bill’s purchasing power is down 44%. In other words, after 20 years, by not adjusting his income for inflation, Bill’s $50,000 has the same purchasing power as $27,000. Meanwhile, Jill’s income has increased to $90,000 to maintain the same purchasing power as her original $50,000.

Luckily, we can discuss ways various insurance products and financial strategies can help account for inflation in your retirement income strategy.

How to Hedge Against Inflation in Retirement

  1. One approach is to use Social Security’s Cost of Living Adjustments (COLA) to bridge the gap.
  2. Another is to use Social Security alongside an investment strategy of stocks and bonds to supplement retirement income.
  3. The final approach we will look at is using both of those partnered with a Fixed Index Annuity (FIA) with an increasing income rider to supplement retirement income.

How Social Security Helps With Inflation in Retirement

Social Security is a prevalent way of providing retirement income. After all, Americans have been paying into Social Security from each paycheck during their working years and will benefit from those years of payments in the form of a dependable lifetime income stream.

However, relying solely on COLAs to keep pace with inflation can become problematic throughout retirement.

Over the past 30 years, the average COLA increase has been 2.39%. However, considering that one of the high costs to retirees is healthcare, which has averaged a 4.8% increase in out-of-pocket expenses over the same period, the problem becomes crystal clear.

A 2.41% yearly gap over a thirty-year retirement is challenging to overcome and may lead to a lifestyle change you may not have planned.

How Annuities Help With Inflation In Retirement

To understand how an annuity with an increasing income rider helps supplement a retirement income strategy, a retiree must first understand how an increasing income rider differs from other income riders.

Level Lifetime Income

Today, most income riders provide a guaranteed amount of lifetime income. That level of income does not change.

As a result, if the annuity generates $10,000 per year, that amount will remain unchanged for the retiree’s life.

Or, to look at it through the eyes of inflation, assuming a 3% inflation rate, after 24 years, the purchasing power of $10,000 will have been cut in half.

Increasing Lifetime Income

Alternatively, an FIA that features an opportunity for increasing income generally provides for increases based on an underlying index or the CPI’s performance.

For example, if the index (subject to the FIA’s caps, participation rates, or spreads) increased by 4%, the lifetime income payment generated by the income rider would increase by 4%.

Today, many annuity companies offer product designs that offer the potential for increasing income. These features take many shapes, so attention must be entirely given to understanding a particular product’s specifics. They also may be offered either built-in or for an additional cost.

Inflation Annuity

How to Take Pressure Off Inflation In Retirement

Next Steps

As Americans prepare for retirement, there are many considerations and risks. Inflation rate risk is one of these considerations that should be addressed when building a retirement income strategy.

When coupled with longevity risk, potentially increasing retirement inflation may quickly become a bigger and more significant risk.

There are many ways to approach this rising risk.

While everyone’s situation is different, when appropriate, a three-pronged approach of Social Security, an investment portfolio, and an FIA with an increasing income rider can help provide you with the flexibility and funding to live the retirement you helped them prepare for.

Check out our retirement calculator to get estimates of your retirement income.

Contact our team today if you’re interested in learning 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.

How To Hedge Against Inflation In Retirement.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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