Don T Forget About Inflation

Don t Forget about Inflation

by

Ishan Goradiya

Inflation HAS Been tame for so long that it s easy to forget how much it can affect your purchasing power over a long retirement. Over the past 10 years, inflation, as measured by the consumer price index, has averaged 2.5% (Source: Bureau of labor Statistics, 2010). At 2.5% inflation, $1 is worth 78 after 10 years, 61 after 20 years, and 48 after 30 years. Thus, you need to look for strategies to lessen inflation s impact during retirement:

? use a conservative inflation rate when planning For retirement. You don t want to run out of money during retirement. So when calculating how much to accumulate by retirement age and how much to withdraw

During retirement, use a conservative inflation rate. While inflation has averaged 2.5% over the past

10 years, it has averaged 3.9% over the past 30 years (Source: Bureau of labor Statistics, 2010).

? determine how Much of your retirement income is indexed For inflation. Social Security benefits are currently indexed for inflation, although that could change in the future. Most defined-benefit pension plans do not make adjustments for inflation. Thus, other income sources will have to fill an increasing income gap over

Time.

? invest in tax-advantaged retirement vehicles. Look into 401(k) plans, individual retirement accounts, and other retirement vehicles. While each has different rules for taxing contributions and earnings, all provide some tax-free or tax-deferred benefits. Since you aren t paying income taxes on earnings during pre-retirement years, that typically means you ll have a larger balance at retirement. Thus, you ll start out with a larger retirement base to help combat inflation s effects.

? choose investments carefully. To avoid losing purchasing power, your after-tax rate of return should be

Higher than the inflation rate. Review your investments annually to make sure you aren t losing purchasing power.

? be prepared For change. After retirement, keep a close eye on your investments. If inflation increases and you are concerned that increasing withdrawals may deplete your investments, you may want to look for ways to reduce your living expenses or go back to work at least part-time.

Ishan Goraydiya is passionate writer and loves writing about

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