Consumers with a fixed income will quickly learn that even mild inflation can take them off track. While current inflation rates are nowhere near the 1970's or other times of extreme inflation, retirees today, for numerous reasons, may be even more vulnerable than their counterparts 30 years ago.
First of all, according to the Centers for Disease Control and Prevention, since 1970, average life expectancies for 65-year-olds have increased three years (from 80 years old to 83 years old.) Furthermore, workers are retiring earlier & now at age 62, down from age 65 in 1970, according to a recent report on MSN Money.
Also, today's retirees are much less likely to have traditional pensions, with less than 20 percent of private workers covered by defined benefit plans as compared with 39 percent covered in 1975 according to The Employee Benefit Research Institute as reported recently on MSN Money.
While few economists believe we will revisit the double-digit inflation rates of 30 years ago, many are convinced that prices could continue to rise in the historic range of three to four percent per year. If you are concerned about inflation during your retirement, here are some steps to protect yourself:
Withdraw with care
How much can you afford to withdraw each year? The key issues include life expectancy for you and your spouse and whether you want your plans to include leaving an inheritance for children or a bequest to charity. While there are many variables to consider, the general recommendation is to not withdraw more than four to five percent of your portfolio each year from a diversified portfolio.
Remember that how much you take out in the early years of your retirement can matter more than many other factors, in determining the odds that you'll run out of money. By limiting your withdrawal you might end up spending less money in the early stages of retirement than you could have afforded. However, it may be better to take that chance than run the risk that your savings may simply run out later in life when you may need the money most.
Play it safe, but not too safe - What may surprise you is that most retirees need a significant portion of their portfolio to remain in stocks ' perhaps 50 percent or more ' in order to offset inflation's erosion, based upon their specific goals and objectives, and tolerance for risk. If you can't rely on income, you earn from a paycheck then you need to keep your portfolio growing even as you pull money out. So-called 'safe' investments, like most bonds, can get clobbered in inflationary times, as steadily rising interest rates erode their value.
Of course, no mater how careful a strategy you devise, be prepared to alter it as your circumstances and the economic environment change.
Keep fixed expenses in line
The more you control fixed expenses by keeping mortgage, care and other debt payments to a minimum, the more flexibility you will have to respond to higher prices and inflation. Consider matching fixed expenses to your fixed income, which should cover all the basic necessities for insurance, food, clothes and shelter. Then your flexible income from investments can be used for discretionary expenses such as travel and entertainment.
If you can't reduce your fixed expenses and withdrawals to a sustainable level, or you are not willing to make sacrifices in your lifestyle relating to your flexible expenses, you may want to consider delaying your retirement or part-time employment to make up the difference.
Get help from a qualified financial advisor who can help you factor inflation in your personalized financial plans and retirement. If you already have a plan, make it a priority to review your specific strategies for beating inflation in retirement at least once a year.
This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. Ameriprise Financial Services, Inc., Member NASD, part of Ameriprise Financial, Inc. Ameriprise Financial is no longer owned by American Express Company.