Inflation affects everyone. It does not matter where you live or how old you are. It is nearly always present and slowly erodes the value of your savings and retirement funds. To develop an accurate retirement plan, you must account for inflation, or you will retire with less than you need.
Looking at the long-term picture, if you want a comfortable future, you may need to save more money than you think. Even when inflation rates are low, your retirement money depends on how much you save now.
The Current Inflation Rate
The current inflation rate for the United States, according to the US Inflation Calculator, based on the Consumer Price Index (CPI), has been held at 3.2 percent from February 2023 to February 2024. The rate is recalculated every month. The highest it has been in recent years was during COVID, when it hit 9.1 percent in June 2022. In 1974, it had risen as high as 12.2 percent, and in 1980, it was 14.6 percent.The Impact of Inflation on Your Savings
An inflation rate of 3 percent for three years means you will need 9 percent more in cash to have the same buying power. In just 17 years, your buying power is reduced to half. Remember, too, that the inflation rate historically has been slightly above 3 percent, but fluctuations in the market mean your buying power could be reduced much faster.Ensure a Higher Rate of Return on Investments
Many financial instruments offer interest on your money. Instead of looking just to earn interest, you are better off if you can find investment options that give a higher rate of return than the current inflation rate. Otherwise, your investment money will slowly dwindle in buying power—the exact opposite of what you want.Typical savings accounts at banks offer interest rates lower than 1 percent. Online banks usually offer a much higher interest rate, but some will require a minimum deposit of at least $500. Other ones may not have a minimum deposit.
Social Security’s Cost-of-Living Adjustments Are Not Enough
Every year, Social Security provides seniors a cost-of-living adjustment (COLA). COLA depends on the inflation rate in the third quarter of the year. Despite this adjustment, Medicare costs ate up this new increase, and everything continues to rise in price.Since the COLA depends on last year’s inflation rate, it will never be enough to cope with this year’s rising rate. Although Social Security is a great financial help for many people, it was never intended to provide all your financial needs while in retirement.
The future of Social Security is also something you must consider. While Congress will likely act, if they do not, Social Security benefits will have to be reduced by about 20 percent in 2034.
Saving for Retirement
Even though there may be a more or less stable inflation rate now, some things rise at a faster rate. Discover, for instance, says food prices had increased in December 2022 in one year to 11.9 percent.The Stock Market
Investing in stocks can be a little tricky. You decide where to invest and the risk level you want to take. Investing in savings bonds is usually among your lowest-risk investments.Stocks that earn the highest interest rates, which can enable you to get fast growth, are also the most volatile. If you are nearing retirement, avoid high-risk stocks unless you have money to spare. Spread your investments among different levels of risk to ensure all will not be lost if the stock market goes south.
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Many investors advise keeping your money in the stock market even when the gains are low. Fidelity has a chart showing what happened to investments in the past few years for those who bailed out of the market but continued contributing, stopped contributing to their accounts and moved to cash, or stayed invested and continued contributing.
Historically, the stock market has always recovered, and people who kept their money in it are glad they did. They now have more value in their stock than if they had withdrawn their money.
Housing Costs
If you own a house that is fully paid for or have recently purchased one, SmartAsset says that it is the best way to go. Inflation will not affect your housing costs. Otherwise, you can expect housing costs to rise—possibly every year, depending on where you live.Since housing will likely be your biggest cost in retirement if you do not own it, you want to prepare for this expenditure to increase during your retirement years. You may want to consider buying a home if you have not retired yet. Only buy what you can comfortably afford and maintain during retirement. Remember that if you rent, you must renew it every year—which can open the door for a landlord to raise the rent.
Build Your Retirement Plan Now
The best thing you can do to prepare for retirement is to save money now. Whether you put it into an employer’s individual retirement account (IRA) or 401(k) in a private plan or investments, the sooner you start saving, the better. Time is the biggest factor in building a retirement savings account. The longer you have investments and other savings, the more they will build because of compounding interest.Use a Retirement Calculator
A retirement calculator—one that allows you to add inflation—will help you know how much you might need for retirement. The inflation factor enables you to understand how much it will reduce your savings by the time you enter retirement or at some point afterward.Calculating for inflation should be an essential part of every retirement plan. Talking to a financial advisor can help you make the necessary adjustments to your retirement savings to help you be ready for a more comfortable retirement.
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