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Inflation: Retirement’s Silent Killer

Inflation: Retirement’s Silent Killer

Let’s take a step back in time – where were you in 1980? Remember it like it was yesterday? In 1980 the average cost of a new car was $7,210. Today on average you’ll pay about $33,000! And we’re sure you’ve noticed the substantial change in gas prices.

These staggering price differences are due to inflation – and it can have a big effect on your purchasing power in retirement. At an inflation rate of 3.0% (a very possible estimate), in ten years your dollar will be worth $0.74 cents. In 20 years it will only be worth $0.55 cents, and in 30 just $0.41!

You can’t afford to forget about inflation when saving for retirement.

Inflation Eats at Savings and Diminishes Buying Power

While inflation won’t reduce the actual amount of dollars you have, it does hurt your purchasing power. And more likely than not, your bank’s interest rate for your savings account is far below the rate of inflation. This is particularly troublesome for senior citizens in retirement who are more likely to spend money on things that tend to increase in price – healthcare being the big one.

According to the Centers for Medicare and Medicaid Services1 (CMS), health care costs are three times higher for elderly Americans than for the average working adult. The CMS also projects that between now and 2025, health care spending will grow at an average rate of 5.6% per year. While Social Security does make cost of living adjustments, these adjustments are based on inflation, and Health Care costs are rising at a much faster rate.

Food and fuel costs can also be volatile, with factors like livestock disease, or drought. You can expect this to continue happening into your retirement.

Planning for Inflation

So how do you fight inflation? You incorporate it into your retirement plan. Assume a reasonable rate of inflation when making your calculations, we’d suggest about 3% per year. You can use an inflation calculator (many are available online for free) or consult a financial professional.

We also highly recommend staying invested during retirement. While your investment objective will likely take on less risk, a good mix of investments can help you keep up with inflation rates.

Prepare to be flexible in retirement. While no one can know what the future holds, know that you may need to adjust your spending in retirement when inflation is high. You could also benefit from sizing down your home, giving you reduced property taxes and homeowner’s insurance.

Inflation can be a burden on your retirement, but it doesn’t have to be with proper planning. Talk to your financial advisor about your retirement plan and how you can leverage your investments to potentially safeguard against inflation.


1. Centers for Medicare & Medicaid Services:

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