Managing Inflation Risk in Retirement
December 18, 2019 by Kelly Lavigne, J.D.
While there are many potential risks to consider when planning for retirement, one that is often overlooked is inflation. Most people factor in inflation when planning how much they will need when they reach retirement. But inflation does not stop the day you retire. In fact, your budget on the day you retire could look very different five, 10 or 20 years into retirement. Not understanding inflation — and more importantly — not having a plan to address it, can derail even the most well-planned retirement strategies.
Based on life expectancy tables, someone retiring today at age 65 could expect to live another 20 years or so. So even with a modest 3% inflation rate, day-to-day costs of living could double after about 24 years, based on consumer price index and Bureau of Labor Statistics data. And at the current rate, health care costs, which play an increasingly important role as we all age, will likely rise at an even greater pace.
Also consider Social Security payments. For 2020, the Social Security Administration raised benefits by 1.6%. That cost of living adjustment (COLA) would increase the average Social Security benefit by just $24 per month. That certainly doesn’t go very far when you factor in the costs a typical retiree is paying each month for housing, transportation, prescriptions, other medical expenses and more. Most recipients will likely not see an increase due to the increase in Medicare costs.
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