Top 5 Factors that Can Derail a Baby Boomer’s Retirement – Factor #3: Inflation


Inflation cuts purchasing power

When some people say, “I’m not an investor,” it’s often because they worry about the potential for loss. It’s true that investing involves risk as well as reward. However, there’s also another type of loss to be aware of: the loss of purchasing power. The law of supply and demand produces price inflation and when there is more money circulating than there are goods and services to buy, it typically results in an increase in cost of goods and services, i.e. inflation. Inflation is painful enough when you experience a sharp jump in prices. However, the bigger problem with inflation is not just the immediate impact, but its effects over time. Because of inflation, each dollar you’ve saved will buy less and less as time goes on. At 3% annual inflation, something that costs $100 today would cost $181 in 20 years. For example, a house worth $275,500 grows to $498,655 in 20 years, while a gallon of milk that costs $3.81 grows to $6.90 in 20 years. Sometimes, items like gasoline for your car can increase at an even greater rate.

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. Assuming inflation continues to increase over time, your retirement income needs will grow each year. Inflation is one of the reasons people–especially those in their 20s and 30s–are often surprised by the amount they will need to save for their retirement. Inflation pushes future costs higher. As a result, the nest egg needed to produce the income required to support your desired lifestyle may need to be bigger.

How Can You Fight the Effects of Inflation? 

  •  Diversify your portfolio – consider including stocks, bonds and alternative assets, but be sure you have the financial and emotional ability to ride out those ups and downs as you try for greater returns.
  • Save more – the more time you have, the more you can save. It’s never too late to get started.
  • Revise your living expenses – if your nest egg goals are too high, you may have to adjust your expected lifestyle to fit your budget.
  • Transfer some of your financial risks to an insurance company – it may be helpful to move some of your assets into a fixed annuity.
  • Work longer – if possible and desired, this can provide more immediate income, can increase your social security (STRS, PERS, or FERS) benefits, and increase savings.

Remember, inflation doesn’t retire when you do.  We are all living longer and you may live for 30 years in retirement, so you need to plan for it.  If you have a plan, review it every 2-3 years.  If you don’t have a plan, see a financial professional to get some assistance and improve the probability of your having a long and happy retirement. We are always here to help.

There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. Investors should understand that investing in strategies that are non-correlated to the stock and bond markets are not without risk. There can be no assurance that alternative investments will be profitable and will even outperform asset classes correlated to the stock and bond markets. These strategies are not suitable for all investors. Investors should be aware that alternative investments may be subject to certain fees, create taxable events, may be illiquid as well as the fact that no secondary market may exist.


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