Prepare for the Rising Cost of Living in Retirement

Save more during your working years, keeping in mind that you will need to give yourself an annual increase in retirement. (iStockPhoto)

Since a young age, many of us have had the “save for retirement” message on our minds. It is virtually impossible to ignore the advice on making the most of 401(k)s and investing additional funds so that when the time arrives you have the financial wherewithal to enjoy retirement.

As part of the retirement planning process, setting up what will be your proposed monthly and/or annual budget plays a pivotal role in determining how much will be enough for you to attain the lifestyle you are looking for. Funds for basics such as housing, food and medical always come first, and then what is left can go toward travel, dining out, and any other activity that you have been itching to pursue over the years.

With all of that taken into account, you also need to factor in inflation. Assuming you are not right on the verge of retirement, it is no secret that your purchasing power will look a lot different by the time you retire. Consider this: the average annual inflation rate since the government started keeping track in 1913 is approximately 3.2 percent. That doesn’t sound too bad until you realize that at that rate, prices will double every 20 years. The fact is that everything will be more expensive and that needs to be factored in when determining how much you really need to save.

[See: 10 Long-Term Investing Strategies That Work.]

However, one aspect that is often overlooked and will likely also have a critical impact on your retirement spending power is the impact of inflation while you are in retirement.

The Stanford Center on Longevity recently reported that Americans are living an average of 30 years longer, which will likely further extend the length of traditional retirement. From the time you step out of the workforce and begin putting your retirement plans into action, the meter is running for the rising cost of living. So if you planned on living off of $3,000 a month, that amount might be fine for the first few years of your retirement. But by the time you reach the middle to later years of your retirement, you might actually need more than $4,000 a month to maintain your lifestyle.

Indeed, it is easy to overlook this aspect of retirement as during your working years, pay scales and raises can help you keep pace with the increased cost of living. However, once you leave the workforce, it is critical to ensure you have a plan in place. Think of it as the need to give yourself an annual increase – the only issue being that you’re the “employer” and therefore responsible for funding the increase.

So how do you go about preparing for inflation while in retirement? While simply living more modestly seems like an easy answer, do not underestimate the impact of inflation. No one likes surprises, particularly during retirement, and having to cut back more than you thought you would need to might be an unpleasant choice and can be avoided with proper planning.

Thinking more proactively, adjusting the amount you are saving for retirement is a step to consider. Save more during your working years keeping in mind that you will need to give yourself that annual increase in retirement. Go beyond planning solely around the total nest egg you will need based just on how far your money will stretch in the years to come. Set aside money for what can easily be a 20- to 30-year period of rising costs once you hit the retirement finish line.

[See: 8 of the Most Incredible Investments of the 21st Century.]

Reliance on Social Security also is a potential pitfall for proper planning. Remember that even if Social Security is still around, do not make any assumptions that it will necessarily adjust each year to match the cost of living. In fact, that possibility is already a reality. In 2016 the Social Security Administration is not even providing its typical cost of living increase.

A strong option for consideration is to ensure that a portion of your overall financial portfolio is designed to help you obtain guaranteed income that has the potential to increase as the years go by in your retirement. A financial planner can help determine an appropriate approach for you, via selected financial products and/or adapting the risk tolerance of your assets to help meet your financial needs and goals.

However, one potential issue to bear in mind is the assumption that equities will outpace inflation. While this is a common approach for the accumulation phase of your retirement strategy, it is important to consider additional ways to help address inflation within retirement so that a bear market doesn’t wreak havoc on your plans. Again, there are selected financial vehicles can help meet this need.

[See: 12 Tips for Investors in Their 50s and 60s.]

So, yes, plan for retirement. But don’t forget to have a plan for once you get there. Taking some simple steps today will allow you to enjoy a long retirement that can be rewarding.

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