Inflation is certainly a word we’ve all heard a lot lately, isn’t it? Whether it’s egg prices, gasoline prices, or home prices, inflation — the rate at which the price for goods and services go up — has hit most people very hard in recent years.
But retirees have to think about inflation in a slightly different way, even when we are not in a period of high inflation like we are in now. Even during “normal” times, inflation is almost always a factor. In fact, the Federal Reserve typically shoots for a baseline inflation rate of 2%. That means even when inflation is fairly low, it can still decrease your purchasing power.
This matters to retirees who, because they are not working, often have a fixed income and a lower growth rate for their investments. I’ll give you an example. Let’s take the period from January 2010 to January 2020. This was an era with a consistently low rate of inflation. In 2010, the Consumer Price Index, which measures the change in price over time for a representative sample of common goods and services, was just 1.6%.[1] Over the next ten years, it sometimes rose, and sometimes fell — but by the beginning of 2020, the CPI was even lower, at just 1.2%. Still, if you had $500,000 in savings in 2010, you would need over $595,000 to have the same buying power in 2020, just because of inflation.[2] That means the value of that initial $500,000 decreased over time, even during a period of low inflation.
During a period of higher inflation, the purchasing power of a retiree’s savings will drop even more. For example, it would take over $615,000 in January 2025 to have the same buying power as $500,000 in January of 2020.
(To see these numbers for yourself, just use the inflation calculator found on the U.S. Bureau of Labor Statistics website.)
For these reasons, it’s so important that retirees factor inflation into their calculations. A static level of income will inevitably decrease in value over time because of inflation. That means it becomes harder to meet the costs that come with retirement, like living expenses, medical expenses, spending on bucket list items, etc.
Many retirees make the mistake of forgetting to calculate for inflation when they plan for retirement, but it’s something you have to consider. It’s why sticking all your money into a savings account (or under the mattress) just isn’t enough. It’s why proper investing is so crucial — it’s the best way for your money to grow in a way that outpaces inflation.
The overall point is that inflation should always be on your list of things to prepare for in retirement. The good news is that by planning ahead, we can always find ways to protect you from a drop in purchasing power. Please let me know if you’d like to set aside time to discuss this.
