How Inflation Can Nibble Away Your Retirement Dreams

By Subodh / June 15, 2016

Retirement denotes beginning of a new stage in life for every professional, regardless of the sector her or she is working in. While it demarcates beginning of the golden days of life, you need to think of financial aspects and plan for living a comfortable life post retirement. As it is, you have to consider a   lot of things for life post retirement. While you have to think of aspects like property, lifestyle, investment, health issues, there is another important aspect requiring your attention. Inflation is a factor that can impact your retirement plans.

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How and why inflation affects retirement plans

As a matter of fact, inflation affects working professionals as well as retired lot. However, your options to earn become limited post retirement and so you need to be more aware of its impacts when approaching retirement. Inflation increases the price of services and goods by a small margin with passing years and initially it may not pose a big problem to a retired person. However, the problem is that it does not stop after a limit! The impact gets magnified over a period of time. For instance, a product costing $1 now will cost $1.05 after a year when the yearly inflation rate is 5%. If inflation rate remains the same for 10 years, the same product will cost almost $1.63. So, with your retirement income what you can buy today will not be same some years down the line.

While working professionals have multiple options to increase their income to combat inflation, the same cannot be said about retired lot. Besides, most people in their sixties and later also lose physical strength to opt for part time jobs etc.

How to cope with inflation in retired life

Retirement

Coping with inflation after retirement may not be easy. However, with proper planning and knowledge of basics of inflation you can be better prepared. You can also make use of several online Retirement Planning Calculators. There are actually so many variables those play a role behind how inflation can impact your retirement income.

7 factors that you have to consider so that inflation does not impact your retirement life adversely:

  1. Unavoidable expenses – There are some steady expenses that you would have to bear in retired life too. These include property taxes, insurance premiums, and related expenditure. Some people also have to pay house rent. These expenses may remain constant or go up, but owing to inflation, the amount of money you spend after buying things and services goes up gradually.
  2. Optional expenses – Thankfully, there are certain types of expenses that you have a control even in retired life. If you think you can do without certain luxuries in retired life or your priorities change, then you can stay without certain services. This brings down the cost of living and you get some buffer against the impact of inflation on income. For example, post retirement you will not need to commute to workplace. This brings down fuel usage need and cost for using public transport as well. Some elderly people may not require specific technology related services and they can choose to live without those.
  3. Fund for Emergency/unforeseen expenses – To stay better protected against the impact of inflation in retired life, it is necessary to create a fund for emergency needs or unforeseen expenses. You never know when some unforeseen incidents can take place and lead to expenditure. It can happen to anybody but with limited income of retired phase, the impact is more severe. So, creating a fund for such needs like a critical illness before you take retirement, acts as a safeguard.
  4. Annuity – A lot of people opts for annuity to ensure they get a fixed income post retirement and stay less affected by impact of inflation. Annuities often have the option to get inflation protection. Investing in short term money back plans that offer returns every few years can also be helpful.
  5. Delaying retirement – It may be a good idea to delay your retirement to stay better protected from inflation in retirement. As it is, salaries adjust quickly against inflation levels and in many sectors jobs are offered with annual increases. However, it may not be possible for all working professionals and health and allied factors can limit his option.
  6. Opting for equities – Equities are said to be effective against inflation, more so for those approaching retirement. Equities offer good returns in the long run, compared to inflation. Even in times of inflation rates higher than usual, equities perform better than regular bonds.
  7. Additional sources of income – To increase income in retired life to cope with inflation, when you are not really in a position to work, there are options. These options may not be available for all retired persons though! For example, you can rent a property you own or a part of the house you live in.

It is true that a few retirement income sources turn out to be better shielded against the impact of inflation compared to others. One instance is social security. It comes with annual cost-of-living adjustment determined by consumer-price-index. This helps Social Security remain somewhat immune to inflation’s effects. It would be a good idea to delay social security to safeguard against the effect of inflation.

Uncertainties of Inflation you have to think of

Inflation does not follow your thought and neither does the pattern remains same across the globe and over the years! In the USA, average rate of inflation tends to be lower than that in other countries, as analysis shows. Inflation rate does not remain same over the years. Many up and down in the rate can occur within a decade or even less time. Inflation also varies across services and goods. For instance, the cost of medical care has shot up sharply in the last decade compared to average inflation. Cost of food and clothing has not shot up that much, as it is. So, when you plan for retirement, these uncertainties of inflation need to be taken into account.

 How you will beat inflation in your retired life? Share your views below.