Tags: Retirement | retirement | inflation

6 Ways Inflation Affects Your Retirement Plan

By    |   Thursday, 11 June 2015 09:33 PM

A dollar isn’t what it used to be, and people who want to retire need to have a good idea of how that reality can affect their future plans. Inflation can wreak havoc on a carefully stowed nest egg if its reality is not part of a good retirement planning process.

Here are six things to consider about how inflation — which Investopedia defines as “a sustained increase in the general level of prices for goods and services” — can affect a retirement plan.

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1. You can’t buy as much
The amount of stuff you can buy with a dollar is called its purchasing power. Inflation will reduce the purchasing power of the money you have saved for retirement.

2. Your standard of living goes down
If inflation happens too quickly, a “hyper-inflation” situation can potentially leave retirees without the means to meet their basic needs. If this happens, a retiree’s standard of living can go down.

3. It gives a boost to Social Security
Inflation will cause an increase to your Social Security check. The Social Security Administration is required by law to give cost-of-living adjustments, known as COLA, to retirees based on rises in the consumer price index. This is a way of making sure that the Social Security benefit is not eroded by inflation.

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4. It may cause a delay in retirement
According to Forbes, inflation risks may mean some people find themselves working longer. Social Security benefits increase up to age 70. Many employers who offer pension plans base benefits off of a top three salary years. Since most employers offer yearly cost-of-living raises, the longer a worker delays retirement, the more their final payments could be adjusted.

5. Inflation changes what kind of investments make sense
It is generally considered wise for people near or at retirement to keep their savings in safer investments such as bonds. However, sometimes those investments do not offer interest returns that keep up with inflation. Treasury Inflation-Protected Securities (TIPS) are designed to increase with inflation and decrease with deflation along with the Consumer Price Index, according to the U.S. Department of Treasury. Equities also are considered smart and reliable investments.

6. It makes retirement unpredictable
The problem with inflation in retirement planning is that the factor can not exactly be planned. Inflation is not consistent, and while most of the inflation rates are below five percent, inflation reached much higher during the 1970s. Inflation affects retirement planning by requiring retirees to be on their toes and keep an eye on investments, even in their golden years.

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A dollar isn't what it used to be, and people who want to retire need to have a good idea of how that reality can affect their future plans. Inflation can wreak havoc on a carefully stowed nest egg if its reality is not part of a good retirement planning process.
retirement, inflation
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2015-33-11
Thursday, 11 June 2015 09:33 PM
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