One of the biggest expenses you could face in retirement may not even be on your radar. It’s not health care, taxes or even food costs. It’s inflation.
Inflation is the incremental increase in the price of goods and services from year to year. It’s a natural part of the economy. As the economy expands—and wages and earnings increase—so, too, do prices. The inflation rate fluctuates, but there is rarely a year in which prices don’t increase at all.
While modest levels of inflation can be a sign of a healthy economy, they can also be dangerous for retirees. Consider the long-term impact of even a modest inflation rate. An average annual inflation rate of 3 percent would double your cost of living over a 24-year retirement.
Social Security increases benefits annually through a cost-of-living adjustment (COLA). However, this adjustment may not be sufficient for retirees. For example, in 2017 and 2018, COLA was set to 2 percent. In 2016 it was 0.3 percent, and in 2015 there was no COLA.1
Consider working part time in retirement? That could be a wise decision. Granted, the main point of retirement is to stop working, so the idea of part-time work may not be appealing. However, there are some key benefits to picking up side work after you retire.
Obviously, the extra income is a primary benefit. If you’re like many retirees, you’ll receive income from Social Security and possibly a pension. However, you also may need to take withdrawals from your retirement savings. Those savings may be vulnerable to market volatility, which could impact your income. Part-time work can help you minimize that risk.
Feeling pressure to save more for retirement? You’re not alone. According to a study from Gallup, more than half of Americans are worried that they won’t have enough money to fund their retirement. In fact, Gallup has conducted a study on Americans’ top financial worries every year since 2000, and retirement has always been cited as the top concern.1
According to a separate study from the Economic Policy Institute, there’s good reason for the widespread concern about retirement. The study found that half of Americans have no retirement savings. The average savings balance is just over $95,000, but the median balance is only $5,000.2
Are you starting to think about your legacy and how you’ll pass it on to the next generation? It’s never fun to think about your own death. However, it’s too important to ignore. You may have a substantial amount of assets that you want to distribute to loved ones. You may have a spouse, children or other family members who are dependent on you for support. You might even own a business that could face hardship after your death.
All these issues require some level of estate planning. If you fail to develop a robust estate plan, you could leave your loved ones, business partners and others in a difficult financial situation.
Do you have a written plan that covers every aspect of your financial life? If your answer is no, you’re not alone. According to a study from the Certified Financial Planner Board of Standards, only 19 percent of Americans could be categorized as “comprehensive planners.” The remaining 81 percent may plan for specific goals or challenges, like retirement or debt management, but don’t have a comprehensive plan that pulls everything together.1
Certainly, some planning is better than none. If you lack a comprehensive financial plan, however, you could be missing out on opportunities and may be unaware of potential threats.
The different areas of your financial life are likely intertwined, so any planning that you implement in one area could affect another. For instance, your retirement planning could impact your estate planning. Your college savings for your children could impact your ability to save for retirement.
Are you approaching retirement? If so, you’re probably finalizing your plans and making sure you’re on solid financial ground. Retirement can be a major financial challenge, so it’s important to take any additional planning steps necessary while you’re still working.
However, you may want to focus your planning on more than just retirement. This is also a good time to review your estate plan. It’s possible that your life has changed since you initially established your estate planning documents. Maybe your plan doesn’t address every possible risk. Maybe you don’t have a plan at all.
Worried about your ability to afford retirement? You’re not alone. According to Gallup’s 2017 survey on Americans’ financial worries, 54 percent of those surveyed said they were concerned about not having enough money for retirement. That number is large enough to make retirement America’s No. 1 financial concern.1
Much of the stress surrounding retirement comes from the unknown. There are many variables and factors in retirement that are impossible to predict. You can’t know how long you will live or how long your retirement might last. You can’t know in advance what kind of health issues you may face. And it’s impossible to predict how economic factors could impact your retirement.
Have you developed a strategy to manage the biggest financial risks you could face in retirement? If so, you may have an emergency fund to cover unexpected costs, a strategy to minimize market risk, and possibly a plan to cover health care and long-term care costs. Maybe you even have a tax management plan.
There’s one risk, though, that many retirees overlook. It’s inflation, which is the regular, gradual increase in the price of goods and services. Inflation is a natural part of the economy. It’s driven by a broad range of factors including labor and material costs, interest rates, and overall economic conditions.
Do you have a retirement savings gap? While you may be feeling some stress about your retirement outlook, you certainly aren’t alone. According to Gallup’s 2017 study of financial concerns, more than half of all Americans are worried about their ability to pay for retirement.1
If you’re behind on your retirement planning, the simple solution is usually to save more money. Conventional wisdom is to increase your contributions to your 401(k) or IRA. However, that may not be possible. After all, there’s only so much money you can put away for the future. You still have to cover current bills and expenses.
How confident are you that you will have enough income and assets to support a comfortable and enjoyable retirement? If you’re like many Americans, you may not be completely confident. According to a 2016 study from the Employee Benefit Research Institute, only 21 percent of Americans say they’re “very confident” that they will have enough money to live comfortably through their retirement years.1
That lack of confidence could stem from a number of issues. Many workers may still be feeling the effects of the recession of 2008-09. Others may be suffering from the reduction in pension programs offered by employers. And many people could simply be behind on their retirement savings efforts.