What Is Your Strategy for Managing Inflation in Retirement?

If you’re approaching retirement, you’ve probably developed a strategy for the biggest financial risks you could face. You may have an emergency fund to cover unexpected costs, a strategy to minimize market risk, and possibly a plan to cover health care and long-term care costs. Maybe you even have a tax management plan.

There’s one risk, though, that is easy to overlook. It’s inflation, which is the regular, gradual increase in the price of goods and services. Inflation is a natural part of the economy. It’s driven by a broad range of factors including labor and material costs, interest rates, and overall economic conditions.

Historically, inflation has been modest. However, even modest inflation can have a big impact over the long term. An average annual inflation rate of only 3 percent would lead to a doubling of prices over a 24-year period. Consider whether your retirement savings could withstand a doubling of expenses and withdrawal rates.

It’s also important to note that inflation doesn’t occur evenly across all sectors of the economy. For example, it’s possible that food prices could increase modestly while utility prices increase at a higher rate. Health care and long-term prices have been known to increase significantly in some years.

The good news is you can minimize the impact of inflation by developing a strategy. A little advanced preparation can help you create a rising income stream in retirement. Below are a few strategies to consider:

Don’t avoid risk completely.

It’s natural to transition to a more conservative investment strategy after you retire. After all, you may be dependent on your savings to generate income. If the market declines and you suffer a significant loss, your income could be impacted. Many retirees aren’t comfortable with a high level of risk.

Discomfort with risk, though, doesn’t mean you should eliminate risk completely. In order to increase your income over time, you will likely need some level of growth. Risk and growth often go hand-in-hand. If you eliminate risk, you may also eliminate growth potential.

Look for strategies that balance risk minimization with growth opportunities. A financial professional can help you find that balance. You also may want to consider annuities, which can sometimes provide downside protection along with upside potential.

Withdraw less money from your qualified accounts.

Your withdrawal rate is the percentage of your account balance that you take each year as a retirement distribution. The higher your withdrawal rate is, the more growth you will need in your account to maintain your balance. The lower your withdrawal rate is, the more money left in your account to grow and compound and generate future distributions.

You may want to examine your planned withdrawal rate and see if you can slightly decrease it. By lowering your withdrawal rate, you give your funds a better chance to grow. That growth could fund increased withdrawal in the future to fight inflation.

Wait to file for Social Security.

One of the simplest ways to maximize your income in retirement is to delay your Social Security filing. You’re eligible to file for Social Security as early as 62, but your full retirement age (FRA) is likely either 66 or 67. If you file before your FRA, you could see a reduction in your benefits.

However, if you delay your filing beyond your FRA, you could see an increase in your benefit amount. Social Security offers an 8 percent benefit credit for every year past your FRA that you wait to file. The 8 percent credit stops at age 70. However, if you can delay to that point, your could substantially increase your retirement income.1

Ready to develop your inflation protection strategy? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.

1https://www.ssa.gov/planners/retire/delayret.html

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16766 – 2017/6/20