Does Your Retirement Plan Include Inflation Risk?

Inflation hasn’t always been top-of-mind when it comes to retirement planning, especially for the last decade or more when inflation was relatively low. When you consider your current lifestyle expenses and desired retirement expenses, you need to account for what the costs of those expenses could be over time.

None of us can predict the future, but we can plan. Inflation has been dramatically increasing, and it diminishes purchasing power over the years by increasing the costs of services that retirees and pre-retirees need. Given that more Americans are living longer, it’s critical to include inflation risk in your overall planning.

The other issue we have to contend with when it comes to inflation is that we may have been lulled into a false sense of security, as government measures of inflation were very low until recently. In addition, safer investments like money market funds, CDs and government bonds generally yield less than the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Lower government inflation measures also have an impact on Social Security benefits. Among the features of Social Security is that benefits can be adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. But sometimes there is a very minor increase given, such as in 2020, which did not even cover the increase in Medicare premiums. The cost-of-living adjustment for 2022 was 5.9%, which is a large jump from 2021’s COLA of 1.3%. 2020’s 1.6% adjustment was lower than that of 2019, which was 2.8%, and 2018, which was 2.0%.

Getting the most out of your Social Security benefit is extremely important for your retirement, and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, so planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement, and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimate that health expenditures would increase 5.7% overall in 2022, up from 5.1% in 2021.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2011, the Kaiser Family Foundation says average family premiums have increased 47% and workers’ contributions have increased 45%, which is quicker than wages (31%) and inflation (19%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses then you know the impact of what higher drug costs or services that Medicare doesn’t cover can do to your monthly budget. We often cite figures from Fidelity Investments, estimating that a 65-year old couple retiring in 2021 can expect to spend $300,000 in today’s dollars for health care and medical expenses throughout retirement. The figure doesn’t include long-term care.

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. There are several ways we can address inflation risk, depending on your situation.

Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk.

Let us know how we can help! Call us.

801.644.2345