As America’s economy reopens, we’re seeing higher inflation rates, and this unwelcome surge should prompt retirees to consider the threat it could pose to their financial security.
The 5.4% rise in the consumer price index in the last year marked the highest inflation in almost 13 years. If you remember the soaring, double-digit inflation rates of the 1970s, you may be worried now. However, even if inflation never reaches those levels again, you still need to consider the eroding effects it has on your nest egg over the long haul.
How Much Will Your Money be Worth in 10 or 20 Years?
Even moderate inflation can have a significant effect on a retiree’s savings. The Federal Reserve’s target inflation rate is 2%, but the Fed has said it will allow inflation to rise above that mark for some time.
Let’s take a look at how an average annual inflation rate of 3% over the next 20 years would impact your finances.
If you needed $60,000 for your first year of retirement, in 20 years you would require $108,366.67 to match today’s purchasing power of $60,000. Another way to look at it: At 3% annual inflation, that initial $60,000 would be worth only $33,220.55 in 20 years.
You need to factor inflation into your retirement plan because you can expect that everyday items, travel and other expenses will continue to rise in cost. Inflation erodes the value of savings and will continue to do so after you retire. Considering the near-zero interest rates of savings accounts, retirees who are living off their savings are especially vulnerable to high inflation. Therefore, it’s important to assess your investment strategy and retirement income plan to see if you’re protected against inflation for the long term.
Social Security Is Not Keeping up
The Senior Citizens League estimates that the average Social Security benefit has lost almost a third of its buying power since 2000 because benefit increases have not kept up with the increasing cost of prescription drugs, food and housing.
This has occurred despite yearly cost-of-living adjustments (COLAs) for Social Security benefits that are meant to make benefit amounts keep up with inflation.
Social Security beneficiaries saw a relatively high cost-of-living adjustment (COLA) of 2.8% in 2018 (for the 2019 benefit year). In 2020, they saw a 1.3% increase (for the 2021 benefit year). In some years, the COLA adjustment has been nonexistent or practically so. It was 0.3% for 2016 and 0% for 2015.
Lawmakers have proposed changing how COLAs are calculated to make benefit increases better reflect the price increases older Americans see.
Source : https://www.kiplinger.com/retirement/603547/how-big-of-a-threat-does-inflation-pose-to-your-retirement536