Inflation in Retirement

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Americans are worried what inflation might do to their retirement finances. According to a recent Thrivent Financial for Lutherans survey of 2,000 American adults, 93 percent of all respondents reported they worried at least “a little” about inflation’s impact on their retirement finances, and a majority, 53 percent, said they worried “a lot.”

Most likely to worry about inflation in retirement were those ages 45 to 54 and those with incomes of $25,000 to $49,999. Still, this fear wasn’t confined by age or income. Nearly half of respondents ages 18 to 34 as well as those with incomes above $75,000 say they worried a lot that inflation would negatively affect their finances during their retirement years.

Rising energy prices are the primary driver behind inflation concerns today. Gasoline prices were up more than 11% in March 2011 alone. The rise in the price of gold over the past two years is also blamed for inflation fears. While inflation may be low in any given year, it’s the cumulative effect that can really add up. Moderate rates of annual inflation in the range of 3% to 3 ½% will more than double the prices of goods and services over the course of a typical retirement. The U.S. Bureau of Labor Statistics reports that one dollar in 2001 had the same buying power as $1.25 today (2011), according to the bureau’s “CPI Inflation Calculator.” Twenty years ago that dollar had the buying power of $1.62 today, and 30 years ago it had the buying power of $2.43 today.

Fixed income investments are not likely to produce a return that is high enough to permit adequate withdrawals and keep pace with inflation. Consider the 10-year treasury today:

Source: Source: FRB, BLS, J.P. Morgan Asset Management. Chart is the 10-year Treasury yield less Core CPI (inflation excluding food and energy, year-over-year). Data are as of 3/31/11.

The best way to prepare for inflation in retirement is to build a substantial savings and keep a sufficient percentage of your assets in equities to fight inflation.  While these types of securities have historically shown the most volatility – the largest ups and downs – they also have historically fared well in relation to inflation.

The most important key to financial security in retirement is to carefully monitor and adjust one’s spending.  You need a financial strategy that is flexible enough to adapt to a person’s changing needs and circumstances. Inflation can be detrimental to one’s retirement finances, but carefully managing your money throughout your golden years can help counter inflation’s impact.


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