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Inflation: Your Retirement’s Largest Challenger

Inflation: Your Retirement’s Largest Challenger

November 12, 2020
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What is inflation?

Inflation, deflation, hyperinflation, and stagflation are terms often used in the media, business, and financial world, but its impact on you and your family in retirement is complicated.

Inflation, as defined by Merriam-Webster, is a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services. Quite simply, inflation, relating to the economy, is a great indicator of health in the economy as greater goods and services are available. However, hyperinflation, which is extreme economic inflation with prices rising at a very high rate in a very short time leads to chaos, confusion, and economic disaster.

Thankfully, the United States has not faced anything near hyperinflation, other than the confederacy during the civil war. Nor are we any more likely to see hyperinflation than any other developed nation. Hyperinflation occurs when central banks “overprint” and citizens abandon faith and value in their currency. Annual inflation, over the past few decades, rarely reaches above 3% annually, with an average near 2%.

Inflation’s Impact on Retirement

Inflation is a threat to retirement savings and is why it is important to have proper financial plans and wealth management strategies intact to combat inflation. In retirement, when most are receiving only fixed income, and returns on their assets solely, it is essential to ensure growth at or beyond inflation. At any time, if inflation outpaces growth, the retiree’s purchasing power will diminish. For example, $50,000 in expenses today, with annual inflation of 2.5%, will cost $104,000 in just 30 years! For many retirees, this could be near the end of life and retirement, but as we’ve covered in the past healthcare costs in retirement are unpredictable and can be extremely costly.

Fixed-Income Assets

The importance of your assets and Social Security to not only provide income for living expenses today but to also grow with inflation is essential. However, it is also highly discouraged to carry equities or high-risk assets, in the near term, for any assets that will likely need converting to cash in the near-term. This is why fixed-income assets, such as U.S Treasuries, money market funds, investment-grade corporate bonds, high-yield bonds, certificates of deposit, and municipal bonds, are common assets in the portfolios of retirees. These assets give you an opportunity to loan/invest in various assets with guaranteed income absent bankruptcy/default on the asset. Assets, such as U.S. Treasury Bonds, however, are backed by “the full faith and credit” of the U.S. Government. Thus there is nearly no risk, the U.S. Treasury, since 1776, has never failed to pay back its lenders. The problem here, however, is that some treasuries yield less than 0.1%, and even 30-year notes yield below 2%! Being that inflation generally outpaces treasury bills, it isn’t possible to solely rely on these incredibly safe assets to outperform inflation throughout all of retirement. This is where a wealth management team, such as KCA Wealth Management’s, is essential to every retiree to ensure they have saved enough, while also maintaining their retirement nest egg through the end of life.

Social Security

Many in America rely on Social Security as it produces approximately 33% of the average retiree’s income. However, as inflation eats into these benefits buying power retirees must spend less or find income elsewhere. This is why Social Security increases benefits annually receive “Cost of Living Adjustments (COLA)”. However with a just 1.3% adjustment in 2021, which was the second-lowest only to 2017’s 0.3% increase, Social Security benefits are not, and likely will not, outpace inflation as we move forward. Thus, throughout retirement, other sources of income will need to make up the ongoing lack of support Social Security will be able to provide as “COLA” adjustments are unable to outpace inflation.

Social Security can be even further confusing and complicated, however, in that you can “choose” to receive your social security as early as 62, but receive reduced benefits, or as late as 70 to receive the maximum benefit amount possible. This is all dependent upon your “Full Retirement Age (FRA)”, which currently stands at 66, but gradually increases dependent upon your date of birth. If you wait until 70, however, for every month from your FRA until age 70 that you postpone filing for benefits, Social Security increases your eventual benefit by two-thirds of 1 percent — a total of 8 percent for each year you wait. This can be extremely generous and be beneficial to many, however, waiting until age 70 delays any payments for years to come. 

This is a very large decision that will impact your family, spouse, retirement, and yourself significantly. This should be decided with significant and careful consideration of both your family’s and your medical history, retirement savings, age of retirement from employment, and long-term goals. Nonetheless, it is always important to request Medicare coverage 3 months prior to your 65th birthday, which is uncorrelated and unimpacted by your decision of when to begin receiving Social Security Benefits. 

How Can I Combat Inflation Today?

Combating inflation is a complicated and unpredictable issue facing individuals of all ages across the planet. Furthermore, overall inflation in the United States hovers near 2%, however, healthcare inflation has increased year over year significantly beyond overall inflation, so properly and adequately planning requires a full analysis of potential and likely expenses.

The best and wisest strategy for combating inflation in retirement is to save as much as possible beforehand, while adequately investing, to maximize your nest egg, and later minimizing retirement costs where possible. Inflation is the key to a growing economy and capital gains; without inflation, the investment and financial system would become unsustainable and dysfunctional. However, the same motivator for gains during the accumulation phase can be a hazard during retirement, so meeting with teams of financial professionals and wealth managers, such as KCA Wealth Management, is essential in ensuring you will have enough in retirement to not only “survive” financially, but prosper and reach all of your goals!

At KCA Wealth Management our mission is to be there every step of the way in supporting the members of our community with the financial and educational resources they need and deserve to prosper in retirement. 

Advisory Services offered through Investment Advisors, a division of ProEquities a Registered Investment Advisor. Securities offered through ProEquities a Registered Broker/Dealer, and member FINRA and SIPC. KCA Wealth Management is independent of ProEquities.