Planning for your financial future in retirement is extremely important, and one of the challenges that retirees face is inflation. Inflation can affect retirees’ ability to maintain their purchasing power over time. In this article, we will look at three ways to plan for inflation in retirement and protect your future income.
Life Stage
Spending during retirement can be divided into three stages: the active and vibrant stage, the gradual decline stage, and the reliance on healthcare stage. In the active and vibrant stage, spending is high as retirees travel, shop, and engage in their favorite hobbies. This stage lasts from around age 55 to 75. Then comes the gradual decline stage, where retirees spend more time at home and shop and travel less. Spending is reduced during this stage when adjusted for inflation, and it lasts from about age 70 to 85. The reliance on healthcare stage replaces what was previously spent on recreation during the gradual decline stage. Spending increases again in this stage when adjusted for inflation, usually occurring in one’s eighties and beyond.
Your Income Level
Your income level also determines how inflation affects you. Higher-income retirees have more budget flexibility to accommodate rising prices for necessities. Therefore, inflation impacts this group less significantly. On the other hand, rising prices for essentials such as food, energy, and healthcare significantly affect the budgets of low-income retirees. You can assume that expenses will increase by 3% annually when forecasting retirement success. You might begin to implement a “spend more now” plan, which could mean reducing income increases later on. This type of planning can allow for increased spending during the active and vibrant phase. The goal is to find a balance between enjoying life now and having enough financial reserves for later living.
1. Maximize Your Social Security Benefits
Social security has an automatic cost-of-living adjustment mechanism. It is a unique source of income that adjusts for inflation for life, and smart planning can help you benefit from it more. The cost-of-living adjustment (COLA) for 2022 is 5.9%. More than one-third of retirees rely on social security to provide 90% of their retirement income. Over half of them depend on social security for more than 50% of their retirement income. One of the most important things you can do to protect yourself from rising prices is to ensure you maximize social security benefits for yourself and your spouse by choosing to delay SSI income until you reach age 70.
2. Choose Investments That Keep Up with Inflation
Some investments and insurance products are more likely to keep pace with inflation than others. The trade-off may be accepting lower income now for higher income in the future. Some common options are classified into safe, medium, and advanced risk levels.
Safe Investments:
– Inflation-protected immediate annuities
Medium Risk Investments:
– Inflation-protected bond funds
– Variable interest rate funds
Advanced Investments:
– Equity index funds that pay dividends
– Real estate investment trusts (REITs)
What about gold? Despite the common belief that owning gold is a good way to hedge against inflation, it has historically served better as a hedge against crises rather than an inflation hedging tool. This means that gold has not kept pace with inflation well during slow and steady inflation periods, but it rises during crisis periods.
3. Rely on Home Gardening and Sustainability
The best thing you can do is to buy everything you might need now if you truly expect inflation. Make yourself as self-sufficient as possible. Buy durable goods now if you are concerned about rapidly rising prices. Make your home as energy-efficient as possible to mitigate your exposure to rising energy costs. Plant your own garden, and if you can, get livestock or at least a few chickens. You will be insulated from rising food prices, and if necessary, you will have something to trade.
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You live in a community where you can walk, bike, or use public transportation to meet your daily needs. This reduces your reliance on high insurance costs, fuel, and potential maintenance.
Bonus: Insurance
Some insurance products can help protect you from inflation as well. Remember that your healthcare costs are likely to rise as you age. Prices increase even when inflation is added to your healthcare expenses. Long-term care insurance can help protect your wealth from high care costs later in life.
Ultimately, you should take steps to safeguard your future income from inflation during retirement. Maximize your Social Security benefits, choose investments that rise with inflation, rely on home gardening and sustainability, and make sure to get the appropriate insurance. By implementing these measures, you can ensure the continuity of your income and protect your purchasing power in the coming years.
Source: https://www.thebalancemoney.com/how-to-plan-for-inflation-in-retirement-2388671
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