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How Does Inflation Impact My Retirement Income?


How Does Inflation Impact My Retirement Income?

Inflation can be a serious threat that will eat away your purchasing power over time if you don’t structure your investments in the right way.

 

Inflation acts like headwind that we are constantly fighting against. You really need to consider the effects of inflation when you are constructing a portfolio, so that your constant income stream doesn’t end up buying you far, far less in the future.

 

Having a stable $50,000 annual payment sounds great until you realize that after 30 years, it’s likely to be worth about $18,000 in today’s dollars. So when you are structuring your portfolio, you really need to keep your eye on not only protecting the principal you need over the next few years, but also maintaining purchasing power,

 

Many individuals do not consider their purchasing power when they make an investment, especially income-based investments such as annuities.

 

So, first of all, I think it’s important to determine what inflation is and how it’s typically measured.

 

What Is Inflation?

Inflation is the increase in the general price level of the goods and services most Americans purchase each year.  To get a better grasp of this, let’s do an example.

 

Say you can purchase a loaf of bread today for $1.00. Over the next 12 months, we have inflation of 5%, that same loaf of bread would cost $1.05. So $1.00 next year can no longer buy the same amount of bread. In fact, if you compare it to the value of $1.00 today, you’d realize that $1.00 in a year, at 5% inflation, would only be worth$0.952 (95.2 cents) in today’s dollars.

 

As the price level of goods in the economy increases the every dollar we have can buy less of the same goods and services.

 

How Do We Measure Inflation?

Inflation is measured each year by the Bureau of Labor Statistics. It’s calculated off of the change in the Consumer Price Index, which measures the general price level of the core goods and services Americans spend their hard-earned cash on.

 

Any pensions or annuities that do not increase the income stream with a cost of living adjustment each year will have their purchasing power eroded over time. Fortunately, Social Security offers a cost of living adjustment for recipients, to learn more about how to maximize your Social Security in a free recorded seminar, sign up for email updates on my blog.

 

Click the link below to continue to a video overview of inflation and the results of the inflation study.

Continue Reading This Guide On RealizeYourRetirement.com

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Comment   |  6 years, 2 months ago from Chester, MD