Inflation Doesn’t Retire When You Do

April 01, 2022

Inflation has emerged as one of the top financial concerns for individuals as they size up the economy for the rest of the year. For good reason - The Consumer Price Index (CPI), the most well-known measure of inflation, climbed 7.9% over the last year, its highest reading since 1981.

Inflation is a thief; it steals the purchasing power of your money.

Retirees have something else to consider: they are subject to a higher rate of inflation than 7.5% CPI. Why might this be the case? Healthcare inflation has outstripped CPI inflation by as much as 3% in recent years.1 And retirees may expect to spend nearly $300,000 to cover medical costs in retirement.2

As an example, see the chart below. The current cost of Medicare is $508, and the projected cost 30 years from now is $1475.

The need to outpace inflation doesn't end at retirement; in fact, it becomes even more important. If you're living on a fixed income, you need to make sure your investing strategy takes inflation into account. Otherwise, you may have less buying power in the later years of your retirement because your income doesn't stretch as far.

Your savings may need to last longer than you think

Gains in life expectancy have been dramatic. According to the National Center for Health Statistics, people today can expect to live more than 30 years longer than they did a century ago. You may need to plan on the probability of living much longer – perhaps 35 years in retirement. Assuming inflation continues to increase over that time, the income you'll need will continue to grow each year.

Adjusting withdrawals for inflation

Inflation is one of the reasons that the rate at which you take money out of your portfolio is so important. Another thing to look out for is called the sequence of returns risk. The sequence of returns risk refers to the uncertainty of the order of returns an investor will receive over an extended period of time

The sequence of returns risk is especially problematic while you are in retirement. Down years, in combination with portfolio withdrawals taken to provide retirement income, have the potential to seriously damage the ability of your savings to recover sufficiently, even as the markets fully rebound.

Invest some money for growth

Some retirees put all their investments into bonds when they retire, only to find that doing so doesn't account for the impact of inflation. If you're fairly certain that your planned withdrawal rate will leave you with a comfortable financial cushion and it's unlikely, you'll spend down your entire nest egg in retirement, congratulations! However, if you want to try to help your income — no matter how large or small — at least keep up with inflation, consider including a growth component in your portfolio.

Is your financial plan ready?

Every financial plan should account for your risk tolerance and the timeline the funds are needed. When considering your plan for retirement, you also need to account for a possible increased life expectancy, future cost of living increases, tax consequences, and your various sources of income, guaranteed or not. If you’re not confident in your current financial plan, or want a second opinion, please don’t hesitate to contact me.

 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual., 2022;, 2022

2.Fidelity Retiree Health Care Cost Estimate, 2021

3. NCHS Data Brief, No. 395, December 2020.