When we think of inflation, our minds often go to short-term inconveniences like rising prices and other cost of living increases. While inflation can certainly have a major impact on your yearly budget, it’s an even bigger drag on long-term finances — like your retirement savings.
You’ve spent years saving for retirement, but inflation is steadily shrinking what those dollars can buy. Have you thought about how much that adds up over time?
Assuming the historical average inflation rate of three percent, $1,000 today would be only worth $477 in 25 years. That’s exactly why your financial plan needs to account for the impact of inflation over time. At Price Financial Management, we look at the whole picture and help you design a plan that doesn’t just work for you today, but for your entire future. Here are some strategies to protect your retirement savings from the impact of inflation.
Account for inflation during your earning years
Retirement planning is all about projecting into the future — determining how much money you’ll need to live the life you want once you stop working, so that you can begin saving to make that vision a reality.
But some people make a critical mistake by failing to account for inflation. Future dollars aren’t worth as much as they are today, which means it will cost more in the future to afford today’s quality of life. By setting an inflation-adjusted retirement savings goal, you’ll have a better idea of how much money you truly need, and you can craft a savings plan during your high-earning years that helps you meet the proper goal.
Inflation-proof strategies closer to retirement
Social Security
Social Security is one of the few retirement income sources that are inflation-adjusted: Its funds increase every year according to inflation, so you never lose purchasing power over the course of your retirement.
That’s why it’s so important to maximize your Social Security benefits. For those born in 1960 or later, you become eligible to receive full retirement benefits at age 67. If you delay claiming benefits until age 70, you can receive an even higher monthly payout: a 32 percent increase over your “full,” inflation-adjusted retirement benefits.
Treasury Inflation Securities
While stocks often produce returns exceeding the annual rate of inflation, their volatility can be risky for people who are reliant on equities income. Meanwhile, fixed income markets like bonds offer a guaranteed return — but often one that barely exceeds the annual inflation rate.
One solution to this conundrum? Treasury inflation-protected securities (TIPS)
TIPS are a particularly useful investment for those looking to protect their retirement income, because they’re adjusted for inflation. While they’re still a fixed income security — and therefore may not equal the returns of the stock market — TIPS ensure your returns aren’t being eaten away by inflation.
Dividend-paying stocks
Dividend stocks provide regular payments to investors and can be an important source of income for retirees. While these stocks don’t have a dedicated inflation adjustment, dividend payments often naturally increase along with inflation, providing a kind of built-in inflation resiliency. These can also be a valuable source of diversification in your portfolio, enabling you to retain some market exposure.
Inflation-protected annuities
Annuities are a form of insurance that provides regular payouts for a predetermined period. For retirees seeking another source of regular income, this can be avery appealing strategy. Standard annuities provide a consistent payout over the life of the term. Inflation-protected annuities, however, offer a different layer of protection.Although initial payouts may be lower than fixed annuities to start, payouts will increase over time to account for inflation.
Develop your own inflation strategy
Inflation is inevitable, but losing your hard-earned retirement to it doesn’t have to be. Get in touch with our team to discover the best inflation-protection strategies for your retirement savings.