Inflation has been tame for so long that it's easy to ignore it when planning for retirement. However, even inflation of 2% or 3% a year, over a period of many years, can seriously erode the purchasing power of your funds. At 2.5% inflation, $1 today will be worth 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years. To combat the effects of inflation on your retirement income, consider these tips:
- Consider investment alternatives likely to stay ahead of inflation
Thus, a significant portion of your portfolio will probably be invested in stocks, which have typically earned returns in excess of inflation.
- Invest in tax-advantaged retirement vehicles
Look into 401(k) plans, individual retirement accounts, and other retirement vehicles. While each has different rules for taxing contributions and earnings, all provide some tax-free or tax-deferred benefits. Since you aren't paying income taxes on earnings throughout the years, that typically means you'll have a larger balance at retirement. Thus, you'll start out with a larger retirement base to help combat inflation.
- Keep fixed expenses as low as possible
If you aren't using a significant portion of your income to pay a mortgage, car payment, or credit card debt, you'll have more flexibility to deal with higher prices.
- Make sure you have plans to deal with health-care costs
While Medicare will help once you turn age 65, it still does not cover many health-care costs. Look into Medigap policies and prescription coverage to help with those non-covered expenditures.
- Minimize withdrawals from your retirement assets
To counter inflation, you need to withdraw larger and larger sums just to maintain the same purchasing power. To make sure you don't run out of funds late in life, keep withdrawals during the early years to a minimum.