WiserAdvisor – Blog

Main Menu

  • Home
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Estate Planning
  • More
    • Personal Finance
    • Portfolio Management
    • Financial Trends/Government

logo

Header Banner

WiserAdvisor – Blog

  • Home
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Estate Planning
  • More
    • Personal Finance
    • Portfolio Management
    • Financial Trends/Government
Retirement Planning
Home›Retirement Planning›Here’s Why Retirees Must Protect Themselves from Inflation

Here’s Why Retirees Must Protect Themselves from Inflation

By WiserAdvisor Insights
December 11, 2019
955
0
Share:
Inflation

Last Modified on December 13, 2019

If you recall your childhood, you will realize how a couple of dollars of pocket money had a greater purchasing power back then than it has now. The cost of living has been increasing steeply over the years, with an average of around 3% every year in the last few decades. This may appear to be a meager figure, but over a period of 25-30 years, this could have a huge impact on your retirement savings. Research points out that at the current rate of increase in inflation, the cost of living may double 30 years from now. The effects of inflation are huge and cannot be ignored, yet many people tend to overlook the impacts of inflation in their financial planning strategies. 

What is inflation and how can it affect your retirement savings?

Inflation can be defined as a general increase in the prices of commodities. It is measured for a basket of goods and services, which may vary with time. Although it is measured on individual levels, starting from the manufacturer to the consumer, many countries also use the Consumer Price Index (CPI) to determine the cost of living. The CPI measure helps governments and central banks to form their policies to combat the rising costs. It is important to invest in options that can outpace inflation in the long run. 

Continued rising prices can have a huge impact on your retirement plans and detrimental effects on your savings. For example:

1. It diminishes your ability to buy things

Inflation devalues the value of a currency over time. This happens because people sometimes keep a limited vision of their savings and only consider their value in the present times. An investment of $5000 dollars with a yearly interest rate of 6% may seem like a good return in the current scenario, but its value may or may not hold the same meaning 20 years from now. It is essential to understand the value of your savings in the future. Here’s a calculator to help you understand how inflation can affect your retirement income.

2. It surpasses the value of Social Security

Although, Social Security benefits are adjusted periodically and commensurate with the Cost-of-Living Adjustment (COLA), inflation nevertheless outperforms the meager increment. In 2019, COLA was recorded at 2.8%. But this percentage falls to account or underestimate the value of certain sectors that can affect the purchasing power for Social Security. For example, between 2000 and 2018, the prices of prescription drugs increased by a staggering 188% due to which the purchasing power of Social Security fell by 34%.

3. It can outrun the return on fixed investments

The average rate of return from bonds and CDs has been only 2% in the recent years. On the contrary, the U.S stock markets have performed well with an average rate of return being 7% a year. It doesn’t mean that we should invest all our money in stocks, as the market is volatile, and carries greater risks than fixed-income instruments. Rather, a balance between high-risk assets and fixed-income assets is the way forward. 

What are the steps you can take to stop inflation from eating away your retirement savings?

Although it is understandably difficult to predict how inflation could affect your future needs, keeping the following points in mind can provide you a cushion against the rising costs:

1. Modify your bond portfolios

Bonds are considered as fixed-income instruments that come with a relatively low amount of risk. However, inflation can affect the value of the returns generated on them. An effective tool that you can use to counter inflation can be a short-term bond. This can shield the bonds from future inflation, and upon maturation, the amount can be reinvested in bonds with a higher rate of interest. Additionally, you can also invest some of your bond portfolios into Treasury Inflation Protected Securities, or TIPS. As they are issued by the U.S government, they carry zero risks of defaulting. Although they provide a lower rate of interest, they are adjusted with fluctuations in the CPI, thereby keeping your investments secure.

2. Befriend stocks

Stocks are known to provide a higher rate of returns but also carry a high-risk rider with them. It is important to diversify your stock portfolio with a mixed bag of safe and high-risk investments. In spite of fluctuations in the short-run, they have shown to give higher returns in the long-run. Interestingly, experts suggest a formula to calculate the percentage of your assets that should be invested in stocks, by subtracting your age from 110.

3. Invest in real estate

There have been instances of downfall in housing prices such as during the Great Recession (the mid-2000s), but at large they have kept pace and even outperformed inflationary trends. You can consider renting out your real estate property to earn money in proportion to the rise in inflation. Commercial real estate stocks such as REITs and ETFs, can be considered as a viable option while dealing with inflation.

4. Delay Social Security benefits

Claiming these benefits after the age of 66, which is also considered to be the full retirement age (FRA), can give you an increase of 8% per year till the age of 70.

5. Reduce your expenses

This is not to advise you to live a life in frugality, but some extravagances can be curtailed with a view for a bright future.

6. Upskill yourself

Not just stocks, but investing in yourself and your skills can also help you battle inflation. This increases your monthly sources of income. You can consider working part-time or picking up a less tedious job after retirement. This can make you self-reliant so you don’t find yourself dependent on others for your financial needs. It also increases your purchasing capacity in the event of high inflation. 

To sum it up

Nobody knows what the future holds; nonetheless, analyzing and factoring-in inflation while planning for your retirement years is a task that should not be left out. You may have seen deflation in the recent years, but inflation, in the long run, is the unavoidable foundation of economics. Economists have traditionally referred to inflation as the worst form of tax since it goes unnoticed in many circumstances. However, modern economists go softer on inflation and consider steep inflation as the real menace. In reality, modest inflation is a necessary evil, signifying growth in the economy. 

It is important to invest your money in options that have the potential to outdo inflation in the future. You must also understand that not all portfolios garner similar returns; therefore, diversifying your assets is the best way to keep your future guarded against inflation. 

Do you need help in finding the right investments that can help you beat inflation? Reach out to financial advisors for advice. 

Tags#401kInflationRetireesRetirementRetirement Incomeretirement planningSocial security
Previous Article

A New Look at Stretch IRAs

Next Article

All You Need To Know About Registered ...

0
Shares
  • 0
  • +
  • 0
  • 0
  • 0
  • 0
WiserAdvisor Insights

WiserAdvisor Insights

A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.

Related articles More from author

  • Retirement Planning

    The Best and Worst States to Retire in

    August 14, 2019
    By WiserAdvisor Insights
  • Inherited-IRA
    Retirement Planning

    Here’s All You Need to Know About Inherited IRAs

    August 29, 2019
    By WiserAdvisor Insights
  • Retirement-Plan
    Retirement Planning

    Why Plan Now for Retirement?

    January 10, 2020
    By WiserAdvisor Insights
  • Financial-Planning-Lessons
    Financial Planning

    Financial Planning Lessons from the 21st Century so Far

    February 14, 2020
    By WiserAdvisor Insights
  • Retirements
    Retirement Planning

    Comparison of The Two Retirements: FIRE and Traditional Retirement

    March 27, 2020
    By WiserAdvisor Insights
  • financial documents
    Financial Advisor Guide

    What are the Financial Documents required while meeting your Financial Advisor?

    July 22, 2019
    By WiserAdvisor Insights

You might be interested

  • Balanced--funds
    Personal Finance

    Everything You Need to Know About Balanced Funds

  • Dividend-on-investment
    Financial Planning

    The Importance of Dividends on Investments

  • Stretch-IRA
    Retirement Planning

    A New Look at Stretch IRAs

  • Popular Posts

  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • financial planning DIY-Checklist

    How to Prepare an Annual Financial Plan – Financial Planning DIY Checklist

    By WiserAdvisor Insights
    June 10, 2019
  • IRAs-Work-401

    How IRAs work? 401k vs IRA

    By WiserAdvisor Insights
    July 4, 2019
  • Retirement-Planning

    Retirement Planning checklist

    By WiserAdvisor Insights
    July 8, 2019
  • Financial-Advisor

    Why and When do you need a Financial Advisor?

    By WiserAdvisor Insights
    July 8, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • monitor your financial advisor

    How to monitor the activities of your Financial Advisor?

    By WiserAdvisor Insights
    July 16, 2019

Don't miss out! Get our Helpful Financial Tips Newsletter

Categories

  • Business Finance (2)
  • Education Planning (23)
  • Estate Planning (16)
  • Financial Advisor Guide (14)
  • Financial Planning (92)
  • Financial Trends/Government (2)
  • Personal Finance (8)
  • Portfolio Management (36)
  • Retirement Healthcare (1)
  • Retirement Planning (66)

WiserAdvisor is America’s oldest and largest independent network of screened financial advisors. We make it easy and convenient for consumers to find and connect with advisors in their area. We have successfully helped over 100,000+ individuals find their best financial advisor since 1998 with no match fees, no commitments, no obligation, and complete confidentiality. WiserAdvisor has been featured in The Washington Post, The Washington Journal, ABC, CBS, Yahoo and has been seen in numerous other leading financial news and information websites.

Follow Us

  • Recent

  • Popular

  • Financial Habits

    5 Healthy Financial Habits You Need to Practice This Year

    By WiserAdvisor Insights
    January 25, 2021
  • Retirement

    Should Your Portfolio Become More Conservative as You Approach Retirement?

    By WiserAdvisor Insights
    January 22, 2021
  • ETFs

    7 Reasons Why ETFs Are Getting Popular Among Investors

    By WiserAdvisor Insights
    January 21, 2021
  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • financial planning DIY-Checklist

    How to Prepare an Annual Financial Plan – Financial Planning DIY Checklist

    By WiserAdvisor Insights
    June 10, 2019

Contact Us

Corporate Headquarters

12150 Monument Drive, Suite 400
Fairfax, VA, 22033

Business Hours

8:30 AM – 5:00 PM EST (Monday – Friday)

Email Address

wa.assistance@wiseradvisor.com

Phone Number

(703) 651-2060

Fax Number

(703) 259-4487

  • Privacy Policy
  • Terms & Conditions
© Copyright 2019 WiserAdvisor.com. All Rights Reserved.

Add WiserAdvisor - Blog to your Homescreen!

Add