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Retirement: A Storm Is Coming - The Inflation Monster

Can you withstand the headwinds of inflation during your retirement journey? Adviser Jeannette Bajalia explains why you need to pay attention and how to prepare for the very real likelihood of inflation in your future.

By Jeannette Bajalia

With historically low interest rates over the last decade, inflation isn’t a risk that we think about often these days. There’s not a lot of talk about inflation, so as we examine the typical retirement risks, most individuals put energy on market risk, longevity risk, and sequence of return risk. Seldom are you hearing about inflation risk, but I want to address it because embedded in inflation risk are multiple factors that create a perfect storm. And I’m not sure all factors are being considered.

Jeannette Bajalia

Most individuals think inflation risk simply impacts your ability to purchase goods and services, such as food and beverages, housing, clothing, transportation, medical care, and recreation. It does, and as these are analyzed by the economic experts, we get an average Consumer Price Index (CPI). Our economic models are based on an “average” CPI. For instance, if we look at the average inflation rate over the last 10 years, it’s 1.8% (source: However, if we consider the average inflation rate over the last 106 years, it’s 3.22%. What inflation rate should you use to determine if you have enough money to retire? That becomes the million-dollar question when it comes to income distribution planning. Let’s look at the below example:

Frank and Mary retired in 2020 with a monthly expense need of $7,500 monthly. Using an annual inflation rate of 3.22%, 10 years into their retirement, the monthly expense needs would be $10,460, and 20 years into their retirement, it would be $14,362. This is for core lifestyle. Now, if we used the 10-year inflation rate of 1.8%, 10 years into retirement Frank and Mary will need $9,045, and in 20 years, their expense needs will have appreciated to $10,812.

The question really is about what should be considered to figure out whether you can withstand the headwinds of inflation during your retirement journey. Remember, this is core lifestyle factors, but what about healthcare and healthcare inflation? Routine healthcare costs seem to be increasing, on average, around 7%. Things are no better when it comes to long-term care costs or skilled nursing care. The national average of assisted living is $4,051 monthly, and for skilled nursing care it’s $8,517. Far too often in financial planning, we build in an average inflation cost that’s understated, and we don’t integrate the inflation associated with healthcare and long-term care costs. I’m inviting you to rethink your position on how you consider inflation, the perfect storm, in your retirement financial and income planning.

Let’s get real with the issue of inflation! It begs the need for attention, since most individuals in retirement depend on Social Security benefits. And by the way, the 10-year average Social Security benefit increase is 1.51%, and the 46-year average Social Security benefit increase is 3.6%. While you can expect an increase in the Social Security benefit, there are years such as 2010, 2011, or 2016, more recently, where there were no Social Security increases, yet Medicare premiums continued to increase. Inflation needs to be considered during your retirement, but it can’t be a one-size-fits-all model. Core lifestyle inflation needs to be built in, and, depending on your life situation, you also might want to include inflation for routine healthcare costs. In addition, you also need to think about yet another inflation focus regarding assisted living and long-term care needs.

What about inflation in tax liability to the government? With the recent stimulus required to combat the impacts of a global pandemic, you can be certain that tax increases will be necessary. It’s not a matter of if, but simply when, we will see a rise in taxes; hence, my invitation to you is to think about inflation using a tiered model and not to simply rely on the CPI. Why complicate matters?

This is a complicated issue due to the following factors:

Longevity – Living longer means a higher likelihood of experiencing a debilitating illness, or a need for skilled nursing care;

Taxes – They will more than likely increase at a time when many individuals are spending their tax-deferred savings. Also, there is significant inflation in your tax status if you shift from a married filing jointly tax return to a single tax return due to a life event;

Economic Events – Due to the global pandemic, the stress on the Medicare and Social Security systems will continue;

Lifestyle Expense Management – This is typically understated in retirement and doesn’t take into consideration costs of longevity, which could include additional home maintenance, car purchases, auto/homeowners insurance expenses, and distribution strategies from investment portfolios;

Coordinated Planning – People often confuse investment strategies and planning strategies.

So, how do you protect yourself? Inflation is inevitable! But, using the tiered approach to planning rather than the one-size-fits-all approach that is typically used in the financial world will help in the long run. It’s always better to “get real” about the difference between investing money and planning to fund your lifestyle for three to four decades. You don’t want to have a retirement dream robbed because of confusion or lack of proper planning. Here are a few ideas to get you started on the right path:

1. Stress test your current financial plan using a lifestyle focus, and make sure you think about various scenarios. This is particularly important for couples who rely on two fixed income sources that could be modified with a life event.

2. Focus on life stage planning – not just financial planning or investment management. Obviously, you’ll need to build in the appropriate inflation factors for your various life stages (i.e. if you get diagnosed with a debilitating illness that will require some type of skilled nursing care in a few years, that needs to be built into your plan);

3. Understand the impact of inflation on your expense needs at your various life stages. A one-size-fits-all inflation model is inappropriate, especially if you’re supplementing your income with tax-deferred savings – inflation has an exponential impact on taxes when you’re using IRA assets.

4. Ensure your investment portfolio isn’t a set-it-and-forget-it. While stocks typically keep up with inflation, they are risky if you’re in a decumulation phase of your life. Protect ten years of income needs in a more conservative portfolio so you can manage the risk of market volatility and inflation in all the areas we described.

5. Never embrace a linear approach to your retirement income planning. It’s critical to create a customized approach that considers worst-case scenario, best-case scenario, and most likely scenario. Looking at these sets of projections helps you make a more informed decision of how to protect yourself with so many unknowns.

The bottom line is that people can tell you to work longer, delay claiming Social Security benefits, invest in dividend-producing stocks, purchase income annuities, and buy this or that. But my professional opinion is that all of this may be relevant to you in some form or fashion, but you don’t know without a fully integrated lifestyle plan. If you have the appropriate stress-tested plan, it becomes self-evident what you need to protect the journey. And, in this case, inflation will not derail your retirement. The role of a financial advisor is to provide data to you to help you make the informed decisions so you can manage a perfect storm.

About the author: Jeannette Bajalia 

Jeannette Bajalia is an author of four books, radio personality, President and Owner of Petros Financial Group and President and Founder of Woman’s Worth®. She has over 40 years of experience as a business professional, and is specialized in ensuring individuals have a retirement plan that allows them to be more emotionally, medically and financially secure. She is also a member of Ed Slott’s Master Elite IRA Advisor network. Jeannette is also a radio personality and radio host of the Woman’s Worth® program.