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How Inflation Can Affect Your Retirement


How Inflation Can Affect Your Retirement
Bob Freeman:Inflation can cause havoc on a retiree's savings. With people living well into their 80's, 90's and in many cases, even longer these days, their retirement money has to last longer than ever before. Even slight inflation can make that tough. For instance, if the nation's standard inflation rate remains at a mere 4%, the money today's retirees have in 20 years will only be worth 44% of its current value. That means that every dollar they spend in the future will only buy them 44 cents worth of product -- a scary thought for those who are counting on a set annual amount to live on.

What exactly is inflation and why does it eat away at retirement savings so much? Inflation is simply the tendency of prices to increase over time. A moderate inflation rate usually does not bother the average working consumer much since even small annual pay raises help to offset it effects. But for retirees who must live on the same monthly amount today, next year and ten years from now, inflation can mean the difference between living a comfortable life in retirement and struggling to make ends meet.

So, what's a retiree to do? According to financial experts there's no real way to cure the ill effects of inflation on retirement. But, there are a few ways to lesson it:

Diversify Investment Risks

Smart investors know that the time to lower investment risk is after retirement, right? Maybe not. While most financial experts agree that retirement is not the time to take big risks in the stock market, it may not be the time to rely only on low-yield investments either. It's impossible to earn higher returns without taking some risk, so if you plan on changing investment strategies do so smartly: diversify.

Develop A Management System

No one wants to cut back on spending after working hard their entire lives to prepare for the future. But, when investment profits hit a downturn, it may be time to cut back a bit. Another trick some experts recommend to help retiree's weather market downturns is to take a year's worth of living expenses and put it into a low-risk bearing account; two year's worth of expenses into a laddered-maturity certificates of deposit; and the rest into higher-risk investments. This offers a way to time withdrawals in a way that allows you to maintain your current standard of living, while being able to weather short-term market swings.

Get Rid of Your Mortgage

Many retirees keep some sort of mortgage in an attempt to save tax dollars. But, the odds are you're paying more in interest on the loan than you're savings in taxes. The best way to keep your expenses down is to get rid of your mortgage.

Using these simply tips won't stop inflation from eating away at your assets and future retirement income, but it can help to slow down the process a bit, and give you more to live on for a longer period of time.

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