Inflation - The Overlooked Retirement Planning Pitfall

Inflation Calculator

Inflation is, on average, approximately 3% per year. This means that a payout we receive today will not have the same purchasing power ten years from now. Input the annual payment you would like to receive to see what it needs to be to have the same purchasing power in the years to come. Column two shows what that payment will have to be in order to retain it's purchasing power in the years to come assuming 3% inflation. Column four shows what that payout would be worth in that corresponding year assuming a 3% inflation rate.

When it comes to retirement planning, we need not look any further than than slew of television and printed advertisements focused on the “target retirement date” to see that this popular approach (shared by so many financial advisors today) focusses way too much on the beginning of your retirement and not enough time is spent on planning for the stages of your “life” throughout retirement.

Because of this, many of today's more sophisticated retirees are turning off the ads and conducting their own research. They are discovering they need an approach and a plan that will allow them to enjoy a long, comfortable, independent retirement; not just the first year, but for many years to come.

You will likely face many financial risks and challenges along your retirement path, some seen and many unseen. There are risks associated with the volatile financial markets and the ever present risk of potentially outliving your retirement income. There are also risks of inflation eroding your purchasing power, and it is this peril that is often overlooked by Madison Avenue and today's financial product sales people.

After the events of the last few years, many people who are about to be retired (or retired right now) are deeply concerned about protecting their retirement savings from future adverse markets. And is it any wonder? As you near retirement or begin living in it, you need to take a closer look at how you’ll maintain your standard of living during retirement. In addition, you may also have retirement assets that are exposed to direct market risks.

If you are like so many other Americans today, you are concerned about how you might be affected by a market downturn. And even though the long-term trend for the financial markets has been positive, there have always been periods of great volatility – the most recent examples of these are from 2000 to 2002, and then again from 2007 to 2009. The timing of these so called “bear markets, “dips,” or “corrections” could impact the amount of retirement income you desire or have available when you need it most.

Thanks to medical advancements and Americans adopting more active lifestyles, we are living longer than the generations before us. In fact, since the early 1900s, life expectancies in the U.S. have generally increased by more than 25 years. So, the positive news is that you may likely live longer than you ever expected. But keep in mind, the longer you live, the longer your retirement savings will need to last also.

According to the U.S. Government Accountability Office in their June 7, 2011 Report to the Senate Special Committee on Aging, “As the life expectancy of U.S. residents continues to increase, the risk that retirees will outlive their assets is a growing challenge. In addition to the risk of outliving their assets, the sharp declines in financial markets and home equity during the last few years and the continued increase in health-care costs have intensified workers’ concerns about having enough savings and how to best manage those savings in retirement.”

While some of your expenses may very well go down as you age and become less active, the cost of living will continue to rise. The costs of your medications, adequate health care, the food you eat and even utilities have historically risen over time. Even modest rates of inflation can create a huge impact on your spending power over enough time.

The rules have changed and today's retirees need realistic approaches that take a departure from the Madison Avenue pop culture approach of focussing on just the beginning date of retirement. Instead, you need to meaningful plan designed with flexibility to achieve a realistic, comfortable retirement with predictable cash flow throughout retirement.

Because of the potential risks associated with the financial markets, many Americans are also placing a greater emphasis on the safety, security and protection of their retirement nest egg, as well as their resulting income. Many are looking to the insurance industry and are purchasing any number of fixed annuities that provide them safety and security while generating cash flow they can’t outlive. And at the same time, they are also purchasing retirement income benefits that can protect their future purchasing power from the risks of inflation.

When shopping for fixed annuities, it is always important to view the ratings of the underlying insurance company and trust that the high ratings of “A” or better are reserved for only the highest quality companies. It is also important to know how long the company has been in business, whether they have had any problems in the recent past, how long the product been available, and what are the underlying guarantees. Many of today's sophisticated consumers will also ask for printed illustrations from the insurance company and examine several insurance companies before selecting the carriers and products that will best suit their needs today and in the years to come.