We’ve all heard of inflation, but what does it really mean and how does it affect us?
Generally, inflation means that prices for goods and services are rising over time. For example, 20 years ago, the price of gas was about $1.50 a gallon. Today, the national average is around $2.25.
Consider this: the average life expectancy for an American man is 76. For women, it’s 81. Now, take into account that the average rate of inflation, which is roughly 2 percent, typically results in a doubling of prices over the course of 20 years.
Translation? That gallon of gas you paid about $2.25 for could cost you $4.50 (or more) in your lifetime. Apply that same logic to groceries, household goods, and even takeout food, and the lesson is clear: Inflation is one of the reasons that many people who retire on a fixed income seem comfortable in their early years, then feel the squeeze when their everyday expenses go up while their fixed income remains, well, fixed.
The average rate of inflation, which is roughly 2%, typically results in a doubling of prices over the course of 20 years.
But there are ways to prepare for—and even combat—inflation and its effect on your wallet.
Your fixed income likely includes Social Security and perhaps a pension from work. Learn which income sources are inflation-adjusted and which will keep their payments level. For example, Social Security has the opportunity to increase each year.
If you have money in reserve and can think long-term, consider committing some of your savings to the stock market if your risk tolerance allows for it. Prices on goods and services usually rise during periods of inflation. When prices go up, companies often charge more for their products, which should flow to the bottom line as higher corporate earnings. In simple terms, stock prices rise when company earnings rise. You don’t need to become a stock picker or a day trader; you may want to just invest in an index mutual fund, or other investment, that tends to follow the overall stock market movements.
If you live in a big house—or a house that seems big for your current needs—you may want to consider downsizing. Downsizing to a home more suited to your lifestyle can save you money on utilities and maintenance, and may even provide you with extra cash from the sale of a larger home, freeing up cash that could be invested for potential growth to provide some protection against inflation. Downsizing also means you will likely be saving on property taxes, which, along with inflation, tends to increase over time.
If possible, delay taking Social Security benefits. Waiting to claim your benefits until after your full retirement age will mean an eight percent annual increase until you reach age 70 when your benefit amount maxes out.
As you approach retirement, you may want to consider purchasing long-term care insurance. Long-term care can be quite expensive. However, long-term care insurance policies often offer a rider that protects against inflation and the costs that come with it.
Planning for inflation during retirement is essential. Your financial professional can guide you in developing a strategy that can help you plan for this inevitable factor.