Protect Your Nest Egg from Inflation

After a lengthy period of low-interest rates, there’s now concern about rising inflation.

What exactly is inflation and why should it worry you?

In the FINRA Financial Literacy test, inflation is one of the basic financial concepts that people struggle to understand. In Economics, it’s defined as the decline of purchasing power of a given currency over time. So, when you experience a rise in the general level of prices, often expressed as a percentage, it means that a unit of currency, like the dollar, buys less than it did in prior periods.

The New York Times reports that inflation climbed to its highest level in more than 40 years in December 2021! The Consumer Price Index, which measures the increase in the price of consumer goods, rose by seven percent. The last time it did that was in 1982.

What does inflation have to do with your retirement funds?

Well, if a dollar has less purchasing power, what you planned for won’t be enough to see you through retirement. Consider that the cost-of-living adjustment for Social Security this year, although the largest for quite a while, is five-point-nine percent. That’s not even going to counterbalance the inflation rate.

Here are some ways you can adjust your retirement savings plans for inflation.

Choose investments wisely. Work with a knowledgeable advisor who can help you pick the right stocks. You’ll need a secure investment that has a track record of 8 percent returns per annum so that you keep pace with inflation.

“Never gamble with your retirement money,” advises Robert Cavanagh, Senior Vice President Investments for David Lerner Associates. “What you need is the sensible middle ground of investing that gives you reliable returns.”

Make the most of Social Security. Delay taking Social Security as long as you can. If you wait till age 70 you can increase your lifetime benefits by as much as 76 percent. This also gives you more earning years to top up your nest egg.

Many Americans don’t take advantage of every possible dollar they can get from the SSA. Some life events can increase your benefits. Look into every possible benefit you are entitled to.

Prepare for future long-term care costs. One of the sectors where rising costs are felt by retirees is healthcare. Unfortunately, as bodies grow older, they do tend to need more care.

Moden medicine has increased longevity, but that just means we have a longer retirement that must be funded. A 65-year-old couple with median drug expenses is likely to need $270,000 to cover their out-of-pocket healthcare costs.

Without proper planning, healthcare costs like these will eat into your retirement funds.  One option is to have a Health Savings Account set up before you take Medicare. Another is a life insurance policy with a long-term care benefit.

Inflation is an unavoidable part of economics – it comes and goes. With proper planning and foresight, you can limit the effect it has on your retirement funds.

 

 

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.