Do you have a strategy to keep up with inflation in retirement? If not, you may struggle to fund your living expenses over the long term. Inflation is the incremental increase in the price of goods and services from year to year. As the economy expands—and wages and earnings increase—so, too, do prices. The inflation rate may fluctuate, but it’s a natural and inevitable part of the economy.
A modest level of inflation can be a sign of economic growth. However, inflation can be dangerous for retirees over the long term. Consider the impact of even a modest inflation rate. An average annual inflation rate of 3 percent would double your cost of living over a 24-year retirement.
Social Security uses something called a cost-of-living adjustment (COLA) to help retirees manage inflation. Benefits are increased annually based on the overall inflation rate. However, COLA may not always be sufficient. For example, in 2017 and 2018, COLA was set to 2 percent. In 2016 it was 0.3 percent, and in 2015 there was no COLA.1
While COLA can be helpful, it may not keep up with inflation for certain services that are specific to retirees. Medicare B premiums have risen by an average annual rate of more than 7 percent over the past 50 years.2 Long-term care prices have risen at similarly high rates.3
The good news is there are steps you can take to minimize the impact of inflation on your retirement budget. Below are a few tips to help you develop your inflation strategy:
Wait to file for Social Security.
You can file for Social Security benefits as early as age 62. However, if you file for benefits before your full retirement age (FRA), which is usually between ages 66 and 67, your benefits will be discounted.
There’s nothing saying you have to file as soon as you’re eligible, though, or even when you reach your FRA. In fact, you can wait all the way until age 70 to file, and there may be good reason to do so. Social Security offers an 8 percent annual increase to your benefit amount for every year past your FRA that you wait to file. If your FRA is 66 and you file at age 70, you’ll get four years of 8 percent increases, for a total increase of 32 percent.4
This increased benefit could help you offset inflation. You might use the extra payment to cover increasing health care costs, long-term care or other expenses. If you can afford to do so, consider waiting to file for Social Security.
Don’t be too risk-averse.
Many people become more conservative with their investment strategy as they approach retirement. It’s a natural sentiment. You’ve worked hard to accumulate your retirement assets. It makes sense that you don’t want to lose your savings in a market downturn.
However, you may not want to avoid all risk. Many retirees make the mistake of eliminating risk completely from their investment strategy. That can be problematic, because risk and return often go hand in hand. If you eliminate all risk from your strategy, you may end up with a portfolio that has little upside opportunity.
You’ll likely need some growth to fund your retirement and to increase your income over time. Work with a financial professional to develop a strategy that minimizes risk but also offers growth opportunities.
Consider long-term care insurance with inflation protection.
According to the U.S. Department of Health and Human Services, 70 percent of retirees will need long-term care at some point in their lives.5 Long-term care is extended assistance with basic living activities such as eating, dressing and mobility. It can cost thousands of dollars per month, and care is sometimes needed for years. Also, long-term care prices have been steadily increasing.
You may want to consider long-term care insurance as a protection tool. These policies cover some or all of your long-term care expenses in exchange for an annual or upfront premium. Most policies cover care provided either in the home or in a facility. Some also offer inflation protection, so your benefit will rise to match increasing prices.
Ready to develop your inflation strategy? Let’s talk about it. Contact us today at Spicer Wealth. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. 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. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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