Today’s retirees face an unprecedented number of financial risks. There’s the danger of longevity and potentially outliving your savings. There’s the threat of health care costs, which can be a rising threat as you get advance in age. There’s economic volatility, which could threaten your savings.
One risk that often flies under the radar is inflation. Inflation is the regular, incremental increase in prices on a year-to-year basis. Many factors drive inflation, including growth in the economy, increased costs for materials and labor, and much more. It often impacts nearly everything you may buy, from groceries to clothing to health care and more.
In recent years, inflation has been modest, so it often doesn’t garner much attention as a financial concern. After all, a price increase of 3 percent, for example, may not sound significant. A 3 percent increase can add up quickly, though, when compounded over time. For instance, a 3 percent inflation rate compounded over 24 years would lead to a doubling of prices.
If you’re on a fixed income in retirement, that kind of gradual increase in prices could quickly erode your purchasing power and your ability to live comfortably. Fortunately, there are steps you can take to combat inflation and protect your retirement. Below are a few action steps to consider:
Don’t file for Social Security as soon as you are eligible.
It might be tempting to file for Social Security as soon as possible. After all, you may have paid into the Social Security system for decades. It’s understandable that you’d want to receive the income as soon as you’re eligible.
There are benefits to delaying your filing, though. For instance, if you file before your full retirement age (FRA), you could see your benefits reduced as much as 30 percent.1 On the other hand, if you wait past your FRA to file, you’ll receive an 8 percent credit for every year that you delay.2 That extra income could be helpful in fighting inflation.
Use inflation-protection tools.
Some tools have specific features that could help you combat rising prices. For instance, annuities can provide guaranteed lifetime income in a variety of ways. In some cases, you can elect to have that income grow each year. Annuities can provide a guaranteed lifetime income stream that increases each year.
Health care and long-term care costs have at times had higher inflation rates than other goods and services. You may want to consider long-term care insurance, which can be used to pay for either in-home care or care provided in a facility. Some policies have optional inflation features, in which you pay slightly more in premiums to guarantee that your benefit will increase as long-term care costs rise.
Don’t max out your retirement account distributions.
If you’re nearing retirement, you may have already gone through the process of analyzing your retirement accounts and determining how much you can withdraw on an annual or monthly basis. If you have a distribution estimate in mind, consider reducing it slightly and taking a lesser amount.
By taking lower distributions, you leave more funds in your IRA or 401(k). Those funds may then be able to continue growing and compounding, which could allow you to take higher distributions in the future if needed. Take a look at your budget and search for opportunities to cut your costs.
Ready to develop a plan to fight retirement inflation? Contact us at J. Harris Financial. We can help you create your strategy. Let’s connect today and start the conversation.
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.
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