One of the most commonly used tips for retirement planning is that one can estimate their retirement expenses simply by taking a fraction of their annual earnings. For instance, you might assume that you will need only 70 percent or 80 percent of your current income to fund your lifestyle in retirement.
While that kind of simple calculation may be helpful for a quick estimate, it does ignore one very important retirement planning component—inflation, or the annual increase in the prices of goods and services. Inflation is often so modest that it’s not noticeable in the short term. Over long periods of time, though, it can have a corrosive impact.
Consider an average annual inflation rate of only 3 percent. While that may seem like a low rate, over a 24-year period it would result in a doubling of prices. How might your retirement be impacted if the costs of food, utilities, health care and more doubled over time?
If you’re like many retirees, a doubling of living expenses would be financially challenging. The good news is there are steps you can take to protect yourself from the impact of inflation. Consider the planning steps below and think about whether you have adequately prepared for retirement.
Cut back on expenses.
One of the most effective ways to combat inflation is to account for it in your budget by cutting back on expenses. Go through your planned retirement budget and scale back your spending in key areas with the understanding that those costs will likely increase over time.
Are you one of the two-thirds of Americans who don’t use a budget?1 If so, now may be the time to change your thinking. A budget can be one of your most useful tools in analyzing and controlling your retirement spending. Put together a budget of your projected retirement expenses, and be sure to leave room for your spending to increase in the future.
Don’t avoid risk.
It’s natural for retirees to want to avoid risk after they stop working. During your career, you may have had more tolerance for investment risk because you were contributing regularly to your retirement accounts. However, now that you will start taking distributions, the thought of investment loss may scare you.
That fear is natural. There may be good reason to scale back on your risk exposure, but you also may not want to avoid it completely. Risk and growth potential often go hand in hand. Vehicles that have no risk also may have little or no opportunity for growth.
To combat inflation, you will need your income to increase gradually through your retirement. One way to do that is to have investment vehicles that can potentially increase in value. Try to find a balance between risk minimization and growth opportunities.
Look for rising, guaranteed* income.
Also consider ways to create guaranteed streams of income that have the possibility to rise over time. Many of the traditional sources of guaranteed income don’t have much growth opportunity. If you have a pension, that benefit amount may be fixed. Social Security benefits may rise with inflation, but they don’t always increase every year.
Annuities offer a variety of ways to convert your personal savings into a guaranteed income stream. Some annuities also allow the opportunity to increase the guaranteed income on an annual basis. Consider your options and look for ways to generate a rising stream of guaranteed income.
Ready to develop a plan to fight inflation? Let’s discuss it. Contact us today at Bridgeriver Advisors. We welcome the opportunity to help you analyze your needs and objectives and develop a strategy. Let’s connect soon.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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