One of the biggest expenses you could face in retirement may not even be on your radar. It’s not health care, taxes or even food costs. It’s inflation.
Inflation is the incremental increase in the price of goods and services from year to year. It’s a natural part of the economy. As the economy expands—and wages and earnings increase—so, too, do prices. The inflation rate fluctuates, but there is rarely a year in which prices don’t increase at all.
While a modest level of inflation can be a sign of a healthy economy, it can also be dangerous for retirees. Consider the long-term impact of even a modest inflation rate. An average annual inflation rate of 3 percent would double your cost of living over a 24-year retirement.
Social Security increases benefits annually through a cost-of-living adjustment (COLA). However, this adjustment may not be sufficient for all retirees. For example, in 2017 and 2018, COLA was set to 2 percent. In 2016 it was 0.3 percent, and in 2015 there was no COLA.1
However, many costs faced by retirees aren’t reflected in COLA. For instance, Medicare B premiums have risen by an average annual rate of more than 7 percent over the past 50 years.2 Long-term care prices have risen at similarly high rates.3
The good news is there are steps you can take to minimize the impact of inflation on your retirement budget. Below are a few tips to help you develop your inflation strategy:
Wait to file for Social Security.
You’re eligible to file for Social Security benefits at age 62, though your benefits will be discounted if you file before your full retirement age (FRA), which is probably between age 66 and 67.
However, you don’t have to file at your FRA. In fact, you can wait all the way to age 70, and doing so will give you a bump in benefits. Social Security offers an 8 percent annual increase to your benefit amount for every year past your FRA that you wait to file. If your FRA is 66 and you file at age 70, you’ll get four years of 8 percent increases, for a total increase of 32 percent.4
This increased benefit could help you offset rising health care costs, Medicare premiums or other expenses. If you can afford to do so, consider waiting to file for Social Security.
Don’t be afraid of risk.
It’s natural to be risk-averse in retirement. You’ve worked hard to accumulate your retirement assets. The last thing you want is to lose them in a market downturn.
However, it’s possible to be too risk-averse. Many retirees make the mistake of eliminating risk completely from their investment strategy. The result is a portfolio that has little risk exposure but also little opportunity for growth.
You’ll likely need some growth to fund your retirement and to increase your income over time. Work with a financial professional to develop a strategy that minimizes risk but also offers growth opportunities.
Consider long-term care insurance with inflation protection.
The U.S. Department of Health and Human Services estimates that 70 percent of retirees will need long-term care at some point in their lives.5 As you may know, long-term care can be costly. Both in-home care and facility care can cost thousands of dollars per month, and care is sometimes needed for years. Also, long-term care prices have been steadily increasing.
You may want to consider long-term care insurance. These policies cover some or all of your long-term care expenses in exchange for an annual or upfront premium. Most policies cover care provided either in the home or in a facility. Some also offer inflation protection, so your benefit will rise to match increasing prices.
Ready to develop your inflation strategy? Let’s talk about it. Contact us today at Trinity Financial. We can help you analyze your needs and implement a plan. Let’s connect soon 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. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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