Why does Inflation matter to Retirees?

A Message from Edge Investment Solution’s Damon Walker:

Source: Edge Investment Solutions BLOG July 13 2020
Why does Inflation matter to retirees?

Over the last few years, the inflation rate in the United states has been fairly low. The average consumer Price Index (CPI) has been 2.1% in 2017, 2.4% in 2018, and 1.8% in 2019. Though the general economic outlook on inflation by the Federal Reserve is relatively stable, when you take a closer look at the economic data and potential impact of inflation on retirees, inflation and rising costs are a bigger concern for those in retirement than the general population.

This is because retirees have spending habits that are different from those of the general population. The “consumption basket” (a collection of goods and services used to measure inflation or spending trends) for retirees (those individuals age 65 and older) shows that they spend more of their money on health care costs and medical services than the general population. In face, when compared to younger age groups (ages 55-65), retirees aged 65+ spend 13.4% of their income on health care expenses versus only 8.1% for all ages.

In 2018, U.S. health care spending increased 4.6% and accounted for 17.7% of the nation’s gross domestic product (GDP).

Now more than ever, retirees need to consider the number of years they might be in retirement. With better health care and longer life expectancy, someone retiring today at age 65 could expect to live another 20-30 years, based on life expectancy tables. Even with a modest inflation rate of only 2.5%, costs would double after about 28 years.

So how can you prepare for these increasing expenses during your retirement?

  1. Understand how inflation could impact your retirement expenses. Determine your potential retirement income expenses and consider the impact of inflation on your consumption basket.

2. Estimate how many years you may be retired. Consider your current heath status and your potential life expectancy. If you are married, consider the possibility that one of you may live for 30 years or more in retirement.

3. Familiarize yourself with Medicare options. Keep in mind that Medicare does not cover everything and supplemental insurance may be necessary for you, which would add to your monthly expenses.

4. Begin a review of your retirement income sources. Determine whether cost-of-living adjustments or increasing income opportunities apply to those sources of income.

5. Consider the impact of low interest rates and high inflation rates during retirement. Your total rate of return may be different than anticipated.

6. Manage your overall expectations of the impacts of inflation and focus on what you can control. Be realistic when you plan for your retirement
income.

7. Work with Kim Holland a financial professional to see what products, such as annuities, can help address the risk of inflation and rising health care costs during retirement by completing the form on the left and Kim will get in touch with you!