Fifty cents - that's what a 16-ounce loaf of bread cost in January
1980. But by the end of 2005, the price had more than doubled to
$1.05. Over the same period, the price of a pound of ground beef
rose from $1.82 to $2.61.
1
Behold the corrosive effects of inflation. As inflation increases,
every dollar buys less and less of a product or service. The U.S.
Bureau of Labor Statistics defines inflation as "the overall upward
price movement of goods and services in an economy." However, to
most Americans, it means that they have to spend more money to buy
the same things. In 2005, for example, they would have needed
$237.01 to buy the identical goods and services for which they paid
$100 in 1980.
2
Will You Have Enough Money to Pay Your Living Expenses?
Even a low rate of inflation can have a dramatic impact on your
"purchasing power." For example, if you retire on living expenses of
$75,000 and the annual inflation rate holds steady at 3%, you would
need more than $145,000 to pay the same bills 25 years later.
3 And
some costs, like health care, rise faster than the cost of other
goods and services. The monthly government Medicare insurance
premium was $5.30 in 1970. In January 2006, it was $88.50 - 1,664%
inflation.
4
Because inflation forces you to pay more for what you need or give
up some items in order to buy others, it can undermine your standard
of living. Not surprisingly, it can exact a heavy price on retirees,
many of whom live on fixed incomes.
Protecting Your Retirement Lifestyle
Inflation can also erode the value of your nest-egg. Interest and
dividend payments are sometimes said to "offset" the impact, but
they are subject to income tax and often do not exceed the inflation
rate.
A plan can help you minimize inflation's effect on your cash flow
and your retirement standard of living. Here are a few strategies to
consider:
- Create a retirement income plan. Determine how much money
you need to fund your retirement lifestyle and pay your
day-to-day bills. Consider your potential lifespan and the
health care expenses you may incur.
- Save as much as possible. According to CNNMoney.com, you
need a portfolio about 25 times the amount you withdraw in your
first year of retirement to support your inflation-adjusted
withdrawals over a period of 30 to 40 years.5 While automatic
investment plans won't assure a profit or protect against a
loss, they will help you save on a regular basis by investing a
fixed dollar amount at regular intervals.
- Balance safety and growth. Many retirees invest in bonds and bank
certificates of deposit (CDs) because of their safety - relative to
stocks - and the income they pay. But these so-called "safe
investments are highly vulnerable to inflation because they
frequently offer returns lower than the rate of inflation and their
real value can erode over time.
- Maximize the potential of your self-directed retirement accounts.
Fully fund your employer-sponsored pension plans, taking advantage
of any employer match. Keep in mind that even when IRA contributions
aren't tax-deductible, they grow on a tax-deferred basis.
- Build on your gains. By reinvesting all interest and dividends, you
can leverage the power of compounding - the growth of earnings on
earnings.
Inflation has become a fact of life. To learn more about how you can
minimize its impact on your standard of living, speak to your
financial advisor.
