A common fear among seniors is outliving their retirement income. There are many different strategies to increase your money and savings, but there is one obstacle that can present a major challenge to retirement planning: inflation. There was a time when a soda cost just a few cents and a gallon of gas was near the $1 mark. Perhaps you have noticed prices for food and other services rise from time to time. If so, then you can see the effects of inflation.
Most products don't rise in price too much during a short amount of time – it more commonly happens incrementally. When making long-term plans for retirement, inflation can be tricky. That's because it can eat away at your savings, so to speak, because things, including health care, will be more costly several years down the road. Whatever amount you are saving now may not be enough later in life. This increases the financial risks for many and causes others to worry that they will run out of money during retirement.
How to plan for inflation
There are certain elements of retirement planning that already account for inflation. For instance, Social Security has a cost-of-living adjustment, which means that once you start receiving benefits, the amount will be adjusted if the cost of living rises. According to the Social Security Administration, the most recent cost-of-living adjustment was a 1.5 percent increase in benefits in October 2013. The next COLA will likely be in October 2014. Seniors can also defer taking these payments until later, which means they will receive higher amounts.
While many seniors depend on these benefits, they are not the primary source of income for retirees. Instead, other savings, investments and income vehicles are typically used to plan for a successful retirement. However, planning for inflation can be more difficult, and some strategies offer better protection than others. For example, annuities are products commonly bought with an inflation rate that accounts for higher costs in the future. In addition, long term care insurance can also mitigate some of the losses from inflation, as these benefits adjust with rising costs.
One option for some is to continue working as long as possible and put off retirement. Having a steady source of income is crucial for retirement, and making a salary in the workforce is more likely to adjust for inflation better than a savings plan. Unfortunately, this is not always an option for all workers, and illness can push some into retirement sooner than they originally planned. For this reason, seniors should ensure they have built in the costs of inflation in their retirement plan.
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