What Is Inflation? Use Our Inflation Calculator To See The Effects In Retirement

Shawn Plummer

CEO, The Annuity Expert

Inflation is a term that gets thrown around a lot, but many people don’t know what it means. In simple terms, inflation is the increase of prices over time. It occurs when the demand for goods and services outstrips the available supply. This can happen for a variety of reasons, including an increase in population or an increase in the money supply. This guide will explore how inflation works and why it is essential to understand. We even include a free inflation calculator to see your savings at work.

What Is Inflation?

Inflation is the increase in the price of goods and services over time. It occurs when the demand for goods and services outstrips the available supply. This can happen for a variety of reasons, including an increase in population or an increase in the money supply.

How Does Inflation Work?

Inflation happens when there is more demand for goods and services than the available supply. This can be due to an increase in population or the money supply. When demand outstrips supply, prices go up. The amount of inflation is measured by the Consumer Price Index (CPI).

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.

Why Is Inflation Important?

Inflation is significant because it can have a major impact on your finances. You will have less purchasing power if prices go up, but your income doesn’t. This can make it difficult to afford necessities like food and housing. Inflation can also lead to higher interest rates, impacting your ability to borrow money.

What Causes Inflation?

There are a variety of factors that can cause inflation. For example, an increase in population can lead to more demand for goods and services. This, in turn, can cause prices to go up. Another factor that can cause inflation is an increase in the money supply. Prices will increase when more money is chasing the same number of goods and services.

Is Inflation All Bad?

Inflation is often considered harmful, but it can be helpful in certain situations. For example, if wages are not keeping up with the cost of living, inflation can help close that gap. Additionally, inflation can encourage people to spend rather than save, boosting economic growth. But, of course, too much inflation can be a problem, and that is why central banks work to keep it in check.

Types Of Inflation

There are two main types of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation occurs when there is too much money chasing too few goods. This can happen when the economy is growing too quickly or when there is an increase in the money supply. On the other hand, cost-push inflation occurs when costs rise, causing prices to increase. For example, this can be due to an increase in the cost of raw materials or wages.

How Is Inflation Measured?

Inflation is measured using various methods, but the consumer price index (CPI) is the most common. The CPI measures the prices of a basket of goods and services typically purchased by consumers. The CPI is then used to calculate the inflation rate, simply the percentage change in prices from one period to another.

How to Combat Inflation

There are several ways to combat inflation, but most involve some price control. For example, the government can institute price controls, forcing businesses to keep prices at a certain level. This can be effective in the short run, but it can also lead to shortages and other problems in the long run. Another option is to let wages and prices adjust naturally, eventually leading to equilibrium.

How Can You Protect Yourself From Inflation?

There are a few things you can do to protect yourself from inflation. One is to invest in assets that will increase in value as prices go up. Another is to have a diversified portfolio so that if one asset class decreases in value, others may increase to offset the loss. Finally, you can try to keep your expenses low so that inflation doesn’t impact your purchasing power as much.

How Can You Keep Up With Inflation In Retirement?

One of the biggest concerns for retirees is inflation, as it can eat away at their savings. However, retirees can do a few things to keep up with inflation.

  • One is to invest in assets that tend to increase in value during periods of inflation, such as real estate or commodities.
  • Another option is to use an inflation-adjusted annuity, which will provide an income stream that increases yearly (YOY) along with prices.
  • Finally, retirees can plan to spend less as they age, which will help offset the effects of inflation.

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.

How To Hedge Against Inflation In Retirement

Next Steps

Inflation is a complex topic, but it’s essential to understand the basics. Understanding how inflation works enable you to make more informed decisions about your finances and the economy. If you’re interested in learning more about annuities and how they can help hedge against inflation, contact us for a free quote below. We would be happy to discuss this option with you and answer any questions you have. Thanks for reading!

What Is Inflation? Free Online Inflation Calculator. Learn How To Combat 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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