In retirement, you and your household will face at least 13 risks, one of which is the economic risk of inflation.
Inflation, the loss of purchasing power, affects the level of prices a retiree—and especially those living on a fixed income—pays for goods and services, according to a report recently published by the Society of Actuaries.
And “high inflation with increasing prices requires retirees to spend more of their retirement resources for goods and services than during low inflation periods,” according to the report.
To be sure, inflation is historically low right now. In fact, the average annual rate of inflation since 2008 is just 1.47%. But inflation can be insidious. For instance, it now takes $12.23 to purchase a good or service that took $10 in 2008.
And inflation can be lumpy, said Carol Bogosian, a co-author of the report and president of CAB Consulting. Indeed, the cost of certain goods and services—medical expenses, for instance—rises faster for retirees than for workers, she said.
Inflation can also take a toll on investors. For instance, retirees who invest in CDs, short-term Treasuries, and money market funds are earning, in real terms (the nominal rate minus the rates of inflation) a negative return on their money. A one-year CD, for instance, is earning 1.3% while inflation (less food and energy) is 1.4% through April. In other words, you’re earning a negative 0.1% investing in a one-year CD right now.
So, what can you do to manage this risk? Bogosian suggested some strategies:
- Optimize inflation-protected sources of income.
- Delay applying for Social Security. For people born after 1943, each year that they delay claiming their Social Security benefits, beyond full retirement age or FRA, will increase their
- Social Security benefit once they do make a claim. The increase will be 8% per year up until age 70. “It really is the most cost-effective way to maximize your inflation-protected income,” said Bogosian.
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