How Inflation And Lack of Inflation Can Affect Your Retirement

Article in Summary

  • Social security beneficiaries will not see a cost of living raise in their benefit checks in 2011
  • It is important for retirees to also invest in assets that appreciate with inflation such as such as stocks and commodities
  • Use the chart below to calculate your future living costs if inflation increases at 3% per year

Gold and Commodities are up, the dollar is going down and the Social Security Administration just announced that again in 2011 there won’t be any cost of living raises in benefit checks.  There are a lot of cross currents out there and the simple question most want to know is how does this affect my lifestyle and retirement plans?

If the Fed (with more Quantitative Easing to jumpstart the economy) and the SSA are correct and there is no “inflation” out there then the purchasing power of your money is the same as always.  However, with all of the monetary stimulus that is taking place it seems logical that eventually there will be some signs of inflation in the future.   That simply means that it will take more of your “dollars” to purchase the same basket of goods.  A good place to test this out is with your grocery bill or simply what you pay each week in gas.  Is it the same as a year ago?  How about 5 years ago?

You see inflation is that silent menace for retirees as it slowly takes more and more money to maintain the same lifestyle.  As the chart below shows a $50,000 lifestyle compounded at 3% inflation becomes considerably more expensive to maintain later in retirement.

Where and how can this affect retirees?  If you are on a fixed pension with no cost of living adjustment or a fixed annuity payment, things may be fine now but become more challenging later in life as you cope with higher prices.  The solution is that when you are planning for retirement that you incorporate not only “fixed” cashflow sources like annuities, pensions and bonds but also assets that generally can keep pace with inflation such as stocks and commodities.  Don’t let the market gyrations of the past few years scare you into trading all of your growth investments for something with a fixed income stream.  While it may seem comfortable now, it may not be so comfortable in 10 years.

Age Year Lifestyle Inflation
62 2010 $50,000 3.00%
63 2011 $51,500 3.00%
64 2012 $53,045 3.00%
65 2013 $54,636 3.00%
66 2014 $56,275 3.00%
67 2015 $57,964 3.00%
68 2016 $59,703 3.00%
69 2017 $61,494 3.00%
70 2018 $63,339 3.00%
71 2019 $65,239 3.00%
72 2020 $67,196 3.00%
73 2021 $69,212 3.00%
74 2022 $71,288 3.00%
75 2023 $73,427 3.00%
76 2024 $75,629 3.00%
77 2025 $77,898 3.00%
78 2026 $80,235 3.00%
79 2027 $82,642 3.00%
80 2028 $85,122 3.00%
81 2029 $87,675 3.00%
82 2030 $90,306 3.00%
83 2031 $93,015 3.00%
84 2032 $95,805 3.00%
85 2033 $98,679 3.00%
86 2034 $101,640 3.00%
87 2035 $104,689 3.00%
88 2036 $107,830 3.00%
89 2037 $111,064 3.00%
90 2038 $114,396 3.00%
91 2039 $117,828 3.00%
92 2040 $121,363 3.00%
93 2041 $125,004 3.00%
94 2042 $128,754 3.00%
95 2043 $132,617 3.00%

About the author

James A. Daniel, CFP®

James Daniel, CFP is the owner of The Advisory Firm, LLC a fee-only financial planning practice located in Alpharetta, Georgia.

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