How Inflation Silently Robs Your Retirement

Even with careful retirement planning, one risk that is often not planned for well-enough is inflation. Inflation alone can hit retirement assets the hardest. The budget retirees begin with will change easily within the first 5-10 years—even 20 years down the road. It is most likely that inflation, assuming a rate of 3-4%, will cause daily living expenses to double within 20 years. Retirees should plan for this because, according to life expectancy statistics, folks live 20-24 more years.

That said, the following things should be taken into consideration when planning the silent killer of retirement:

  1. With aging comes more health concerns and more medical bills. Given that inflation will increase day-to-day life, it is predicted that health care costs and services will increase, too.
  2. Social Security benefits will increase for retirees. In 2020, benefits went up by 1.6% which was an additional $24 paid out; accounted when considering cost-of-living adjustments. However, the extra money from SS is offset by huge cost increases across the board. For example, medical services and cost go up; as does Medicare costs. SS should only be considered a baseline for retirement funds.
  3. As mentioned, living expenses are predicted to double within 20 years due to inflation. With inflation, spending power for retirement assets could drastically be reduced if not accounted for properly.

Tacking this silent killer and its concerns takes careful planning and risk managing.

With life expectancy, family medical history and personal medical concerns need to be discussed. Family history of heart disease and cancer will affect your life expectancy. This in turn will determine how long your funds will need to last. If your family members are known to pass away early on or live well into their 90s, this will also factor into how long your funds will need to last. Longer life expectancy means a longer time inflation will affect cost and standard of living.

Reviewing medical history in advance will also allow for the retirement budget to account for any major medical expenses that could arise. For example, a history of knee injuries could mean a knee replacement in your early 70s. Your occupational hazards could cause late-life conditions. If you spent your working years in a steel mill, you have a higher risk for COPD. Planning for these major medical expenses in advance will allow for inflation to be accounted for, for the money to be there if necessary. In retirement, folks spend $250,000-300,000 in medical costs alone.

To account for inflation a realistic budget plan should be set. This includes daily expenses, monthly bills, and additional spending such as travel and hobbies. Factoring into this budget, would be those said medical costs, too. Once a budget and cost-of-living expenses are decided, it is important to review how high inflation rates and the historically low interest rates affect other return rates and income during retirement.

Have a strategy addressing inflation in place. Begin with small withdrawal rates and increase as cost-of-living and inflation go up. During retirement, the small withdrawal rates will be a huge part of your income. Larger withdrawal rates will make deplete retirement funds much sooner—potentially running out of money before running out of retirement. If possible, during working years, saving more will go a longer way. Investing your future retirement younger will also help offset inflation. Consider different income sources: Annuities, long-term care policies, life insurance policies.

Creating an income strategy and working with a Retirement Risk Advisor is key to a safe and secure retirement. Discussing options that can reduce inflation and provide the best management for retirement will save you money and time and give you peace of mind.

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2022 and You: Cause and Effect

In 2021, inflation reached a 40- year high from gas, lumber, the housing market, and even groceries. It was reported in October that the U.S. experienced an increase by 6% for the consumer price index. By November, a 7% increase was noted—the largest increase in such a short time since late 1982. Unfortunately, Americans, on average, brought more money home in their paychecks, but were not able to reap the benefits due to the inflation.

What does this mean for inflation in 2022? Economists have a gloomy outlook. With the unexpected, but impending price increases, it is important to allocate more in the budget for groceries and gas. To offset inflation, add more money to your emergency funds as you can. This will keep your retirement funds more secure.

Required minimum distributions, RMDs, had major changes in 2021 (and in 2020 when the Covid-19 pandemic started). As withdrawals for qualified retirement accounts—401(k)s, traditional IRAs, or 403(b)s—RMDS experienced a recent change that affects the age for when you can withdraw. Now it is 72 for those born after July 1st, 1949, and 70 ½ if born before then.

In 2020, RMDs were suspended under the CARES Act. This was in response to the 30% market drop that March. The hopes were to let the retirement money stay in the market and recover, but the 2020 change was short lived. RMDs resumed in 2021.

2022 Lookout:

Based on inflation rates, the IRS does make changes to tax brackets. Due to the 2021 inflation increase, the tax thresholds will drastically change.  This means more money can be earned before an individual or couple is bumped into the next tax bracket. Using tax-planning tactics during your working years and having a retirement plan in place allows for this potential risk to be easily managed during retirement.

Another major change happening this 2022 year is 401(k) contributions. The IRS is changing the max contribution for taxpayers. The increase is $1000 to $20,500. If you are age 50+, you get an additional $6500 as catchup. Unfortunately, traditional and Roth IRAs contributions are staying the same as 2021. However, high-income earners may be able to contribute to a Roth IRA. Income phase-out ranges were increased by the IRS to allow this. Ranging from $129,000 to $144,000 for single taxpayers and $204,000 to $214,000 for married and jointly filing.

**For more information on how is in store for 2022, please listen to Retirement Risk Show episode “The Know-How of Retirement Planning in 2022.” For all the challenges and changes 2022 will and may bring, register for our “Evolving Retirement Law: The Challenges, The Changes, and Your Choices” webinar.

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