Stay ahead of inflation in retirement

Inflation, a sustained increase in the price of goods and services in an economy over a period of time, averages a little over 3 percent annually.¹ For the 12 months ending July 2018, U.S. inflation stood at 2.9 percent.² As the economy grows, inflation tends to tick upward, and retirees and near-retirees may be especially concerned about how this will affect their finances.

Inflation makes a big difference in how far your dollars stretch. Look at the purchasing power of $100 in 1971 compared to today:

• According to the Bureau of Labor Statistics Consumer Price Index (CPI), 2018 prices are 504.4 percent higher than prices in 1971. In other words, $100 in 1971 is equivalent to $604.41 today.³

So how do you stay on top of inflation?

Understand that Social Security income merely increases in proportion to inflation; It keeps pace with it, but never outruns it. If you want to beat inflation in retirement and maintain your purchasing power and related quality of life, don’t look to your Social Security benefit. Investing with the goal of staying ahead of inflation should be a part of your plan.

Evaluate the benefit of extremely conservative investments. If you favor ultra-conservative investments, you may effectively end up living on less as your buying power dwindles. And in recent years, some costs have risen much faster than the inflation rate — such as prescription drug prices — which many retirees can’t forgo.

Allow for some “growth” investing in retirement. While it is prudent for investors to assume less investing risk as they age, accepting some risk by staying invested in equities may be necessary. In a good year, equities may post much greater returns than fixed-income investments. If you’re looking at decades of retirement, it may be worth accepting the volatility that comes with investing a portion of your assets in equities. 

Pay attention to the CPI to help you gauge your spending and saving needs. The latest CPI data can be found on the Bureau of Labor Statistics’ website at https://www.bls.gov/cpi/.

There are many other ways to stay ahead of inflation no matter what life stage you are in. Whether you’re already retired or are about to retire, a Northwest Financial Advisor can help you discover what your options are to as you seek to outpace inflation.

¹Inflationdata.com. Long Term U.S. Inflation – Average Annual Inflation by Decade, McMahon, Tim. April 1, 2014. https://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp  

² USinflationcalculator.com. Current US Inflation Rates: 2008-2018. https://www.usinflationcalculator.com/inflation/current-inflation-rates/

³TheBalance.com. What are the Effects of Inflation on the Economy? Kennon, Joshua. Updated July 11, 2018. https://www.thebalance.com/what-are-the-effects-of-inflation-357607

Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific financial, tax or legal advice or recommendations for any individual. Please consult your financial, tax or legal advisor regarding your specific situation.

Investing involves risks including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.