Once your retirement starts it should be even easier to run the plan, right? Just pay out the money on time at a fixed rate that keeps up with your expenses.
But what about inflation? Inflation is the hidden demon of many retirement plans. What might have seemed like an adequate amount of cash when you were in your 30s or 40s now might not be enough to keep up the new costs of everything once you’re retired. This is something that financial experts urge investors to consider, and are even highlighted in shorter guides like the 15-minute retirement plan.
So how do you keep up with inflation after retirement?
The Old Rule
The usual rule of thumb is to account for 3% inflation, but that’s not adequate according to some analysts. In the 1980s, inflation was approaching near 8% and that’s just normal conditions. If a huge and unexpected event hits, like a depression or hyperinflation, it can wipe out most of the value of a retirement account in a flash.
It’s not wise to worry about these special events, as there is little that can be done to guard against them. But inflation is something that will eat at your accounts. It’s an even bigger worry now because people are living much longer than they used to. If your calculations say you’ll live to 75 and you end up living to age 95, that’s 20 years of 3% (or more) inflation to account for. No wonder it’s getting so expensive to retire!
What Can Be done?
One guide recommended by the AARP is to ditch the 3% figure and instead look at something called the Inflation Price Index, or CPI-E. This is a consumer price index, which is used to measure inflation rates, that focuses on spending patterns that are specific to the elderly. But even this guide would only provide a baseline inflation hedge to save up for. Here are some things that have a definite impact on inflation risk.
First, delay your Social Security benefits as long as you can. Because benefit amounts are linked to the rate of inflation, you can get a few years of preventing inflation from eating away your Social Security. Working for as long as possible before retirement is also an option, though not available to all seniors depending on industry and health.
Another thing you can do is to put your money into securities that have inflation protection. Inflation protection will increase the payout of certain securities like annuities over time. However, this costs extra money to purchase. You will need to take this cost into consideration to see if the benefit is worth it.
Other things that can be done include:
* Investing in equities or commodities.
* Moving money out of bonds and other conservative investments if their return drops below the inflation rate.
* Purchasing I-bonds, which are hedged against inflation.
For more information about any of these options, speak with a certified retirement financial planner. Regardless of what you do, inflation is something that cannot be ignored. If you’re currently saving at the 3% rate, it’s time to reassess before you end up in a situation you can’t repair in your old age.