Will retirement income keep pace with inflation? This was the concern of 41% of retirees surveyed in June of 2021 per Notable Number 3 in this week’s Weekly Market Review. One wonders what that percentage of concerned retirees would be if surveyed today; I’m guessing much higher than 41%.
There has always been a need to keep up with inflation in your retirement years so that your purchasing power and your lifestyle does not become reduced, but the recent spike in inflation has been an unwelcomed wake-up call that inflation is dangerous, especially to those who are no longer working.
While most workers today can only dream about having a pension, those retirees lucky enough to have a pension almost always have static payments; meaning the actual payment amount they receive will never increase. Even at modest annual inflation of 3%, the purchasing power of the pension gets cut in half over 24 years. At 5% inflation, it only takes about 14 years for that pension to buy half the amount of goods and services.
Social Security has an annual inflation adjustment called COLA (cost of living adjustment) which sounds great, but retirees who have been drawing social security for any length of time will be quick to remind you that the cost of Part B Medicare often times increases by about the same amount of the COLA adjustment. The end result is that the inflation increase from Social Security feels pretty muted.
So how to you beat the inflation risk as a retiree? For starters, long before retirement arrives you need to be investing in things that have historically kept up with, or outpaced, inflation. Two such asset classes are real-estate and the stock market. Additionally, early in retirement, it is ideal to not need all the dividends or income your investment assets produce. This allows you to continue to reinvest and grow your assets even while drawing some income from them. This approach allows you to give yourself a raise later in retirement when inflation dictates you need more income.
The real key to success in retirement starts decades before you actually retire. Saving for retirement requires discipline and a well laid plan. If you aren’t budgeting at least 15% of your current income towards your investments you will someday rely on in retirement, then I encourage you to revisit that monthly budget. While important, analyzing your current spending is not an easy thing to do at this point in time due to…you guessed it, INFLATION. If you don’t think you are on track, we are here to help you improve your plan!
As always, we hope your find the Weekly Market Review both informative and interesting. Have a great week!
Trevor N. Coe, CFP®