There is one important retirement risk that often goes unnoticed by retirees. It’s inflation, which is the incremental increase in the price of goods and services on a year-to-year basis. Inflation is easy to ignore because it’s often modest on a year-to-year basis.
Over time, though, inflation can have a sizable impact on your spending power and your ability to cover your cost of living. For example, an average annual inflation rate of only 3 percent per year could double prices if it’s compounded over a 24-year period.
Inflation is caused by many factors, including interest rates, economic growth and much more. It often impacts everything from groceries to energy to health care and nearly every other type of product or service you might purchase.
You may already have an idea of how much money you can afford to spend each month in retirement. What if your cost of living doubles over the course of your retirement? What would that kind of increase in prices do to your retirement savings?
Fortunately, there are steps you can take to manage inflation risk. Below are three strategies you can utilize to protect yourself and your financial stability. If you haven’t considered a plan to combat inflation, now may be the time to do so.
Wait to file for Social Security.
You may be tempted to file for Social Security at 62, as soon as you become eligible. It’s an understandable desire. After all, you’ve probably been paying into the Social Security system for many years. Retirement is your opportunity to finally collect benefits.
There’s good reason to wait to file, though. If you file before your full retirement age, you could see your benefits reduced as much as 30 percent. Most people reach their full retirement age sometime between their 66th and 67th birthdays.1
If possible, you might want to wait beyond your full retirement age to file. Social Security offers an 8 percent credit to your benefit for every year past your full retirement age that you delay filing. You can delay all the way to age 70. That additional income could provide much-needed protection against inflation in the later years of your retirement.2
Don’t be too risk-averse.
Many retirees are also tempted to minimize investment risk as much as possible. Again, that’s an understandable wish. You may be relying on distributions from your savings to fund your expenses. If you suffer an investment loss, you may not be able to withdraw as much as you would like from your savings each year.
However, you may not want to eliminate all risk exposure. To keep up with inflation, you will need some level of growth. Often, growth and risk go hand in hand. If you eliminate risk completely, you also may be eliminating growth opportunities.
Instead, try to develop a strategy that balances risk management with growth potential. You may also want to consider tools like annuities that offer upside potential and limited risk exposure. A financial professional can help you find the right strategy for you.
Use inflation-protection tools.
There are tools available that could help you better manage inflation. For example, annuities offer a variety of ways to create income streams that are guaranteed* for life. In some instances you can create an income stream that will not only last for the rest of your life but also increase on an annual basis.
You also may want to consider long-term care insurance that has inflation protection. Prices in the health care and long-term care industries sometimes increase at a faster rate than those of other goods and services. Long-term care insurance provides protection to help you pay for long-term care costs. If you add inflation protection to the insurance, the benefit will increase to keep up with rising long-term care prices.
Ready to develop your inflation protection strategy? We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16530 - 2017/3/22