Even at current rates, be sure to plan for inflation
Three to four decades ago, inflation and its impact on families was one of the biggest concerns for most Americans. That was a time when the annual inflation rate topped 10 percent on more than one occasion and was often well above 5 percent.
For the 10 years ending in 1983, the average annual inflation rate as measured by the Consumer Price Index or CPI was 8.4 percent. For every dollar a person spent on standard of living costs in 1973, they paid more than double — $2.24 — a decade later based on CPI.
In that kind of environment, it was no wonder that inflation was such a threat.
Fast forward to today. For the 10-year period through 2013, the average annual inflation rate was only 2.38 percent. An item that cost a dollar in 2003 only cost $1.26 at the end of 2013. In fact, the annual inflation rate (CPI) has never been higher than 3.8 percent in the last 20 years — and only higher than 3 percent in six of those 20 years.
In light of that, inflation has become a back-burner concern for many of us. But should it be forgotten as you make your plans for the future?
Even though inflation has been well managed for some time, the cost of living continues to rise.
With an inflation rate of just 3 percent per year, living costs will double in less than 25 years. Any retiree in good health can reasonably expect to live that long in retirement.
As a result, even if inflation remains a “non-factor” as it has been over the last two decades, your expenses will increase over time. Regardless of what stage of life you are in, you need to prepare for the impact of inflation. It is particularly crucial if you are in or near retirement, a time when you can no longer count on pay raises to cover higher living costs. Your savings have to do the work for you.
For those in retirement, certain expenses, like housing and health care, may become more significant and those costs have the potential to rise faster than the overall inflation rate.
Changes in essential expenses like food and automobile costs can also have a dramatic impact on living expenses for retirees.
Keeping up with inflation is about having enough money to maintain the lifestyle you’ve become accustomed to. Will you keep pace with rising living costs you’ll face in the remaining decades of your life? Here are four steps to consider that may help you stay ahead:
• If you are still accumulating money for retirement, set aside increasing amounts year-after-year. If living costs are likely to rise in most years during retirement, inflating your retirement plan contributions regularly while working will help offset some of the impact of future inflation.
• Delay retirement by a year or more and let additional dollars accumulate in your savings.
An added bonus? You’ll avoid having to deplete your funds at a younger age.
• Protect against risks that could result in greater expenses later in life. In particular, prepare for medical and long-term care costs by exploring appropriate insurance coverage.
• Consider income sources that offer inflation protection. If you receive Social Security benefits, they are adjusted for inflation each year.
As you plan for retirement, it’s important to consider the impact inflation could have on your retirement. Talk with a financial professional to make sure you’ve accounted for inflation in your retirement plan.
Forrest Johnson is a financial advisor with Ameriprise Financial Services in Natchez.