3 Ways to Plan for Inflation in Retirement

As an upcoming retiree, could you be too worried about inflation? Maybe so. Financial planners and online advice articles often say you’ll need an ever-increasing income to maintain your purchasing power. But studies of real retiree spending patterns tell a different story.

Your Life Phase

Spending in retirement can be broken into 3 phases, the go-go years, the slow-go years, and the no-go years. During early retirement (the go-go years), spending is high. Retirees travel, shop, golf, fish, and actively enjoy their free time. Depending on health this phase spans ages 55-75.

Then come the slow-go years, where due to health or age, you stay home more, and shop and travel less. Spending in inflation-adjusted terms has been shown to decrease during this phase, which spans the 70-85 age range.

During the no-go years, spending on health care replaces what used to be spent on entertainment items. In inflation-adjusted terms spending creeps back up during this time, usually in your 80’s and beyond.

Your Income Level

Your income level also determines the effect inflation has. Higher income retirees (75k annual incomes and greater) have room in their budget to absorb price increases on essentials – inflation doesn’t have a huge negative impact on this group. For lower income retirees increases in basics like food, energy, and medical takes a bigger bite out of their budget.

When projecting retirement success, assume expenses will go up by 3% each year, in line with historical inflation rates. Then we begin working on a “spend-more now plan” which may mean less income increases later. This type of planning can allow more spending in the go-go years. The goal is to find the balance between enjoying life now and holding enough financial reserves to account for later-life too.

Here are 3 things you can do to protect your future purchasing power.

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