Today, there are retirement risks retirees face unlike those faced by previous generations. There’s the fact that people are living longer than ever, which means retirements are lasting longer than ever. Your retirement funds may have to last for several decades.
Health care and long-term care costs are also a considerable risk. As you get older, it’s natural to assume that you may be more vulnerable to injuries and illnesses. There’s also the very real possibility that you could require long-term care, which is extended assistance with basic living activities like eating, bathing and mobility.
However, there’s another risk that you shouldn’t ignore. It’s inflation, which often isn’t as noticeable as risks like market volatility or medical expenses. Inflation is the incremental increase in the price of goods and services on a year-to-year basis.
In recent years, inflation has been relatively modest. However, even modest inflation can have a big impact. Assume annual inflation averages 3 percent per year over the course of your retirement. After 24 years, that 3 percent inflation would have compounded and doubled prices. Consider what it would mean to your retirement plans if your cost of living doubled throughout the course of your retirement.
Fortunately, there are steps you can take to minimize the inflation threat. Below are three tips to consider for your retirement planning. They can help you maximize your income and keep up with rising prices.
Maximize your Social Security benefits.
You’re eligible to file for Social Security benefits at age 62. However, you don’t get your full retirement benefit if you file at that time. To get your full benefit, you have to wait until your full retirement age (FRA) to file. Most people reach their FRA between their 66th and 67th birthdays. If you file before your FRA, your benefits could be reduced as much as 30 percent. And that reduction is permanent.1
On the other hand, you could delay your filing past your FRA. Social Security offers an 8 percent credit for every year past your full retirement age that you delay filing. You can delay all the way to age 70, which gives you potentially four years of credits. That increased income could be useful in fighting inflation in the later years of retirement.2
Consider inflation protection tools.
There are several types of financial tools that have features designed with inflation in mind. For example, annuities can provide guaranteed lifetime income in a variety of ways. Some even offer options in which your income increases by a certain amount each year. You then have built-in guaranteed protection against rising prices.
Also, consider that health care and long-term care costs may rise at a faster rate than prices for other goods and services. Long-term care insurance can be an effective way to protect against either in-home assistance or a stay in a facility. Many policies offer inflation protection riders, which increase your benefit amount every year to keep up with rising long-term care costs.
Take less than you need in retirement distributions.
You may have a target income amount that you plan on taking as a regular distribution from your 401(k), IRA or other retirement accounts. Consider looking at your budget and finding areas to cut back on spending so you can take a lesser amount.
By reducing your distribution amount, you leave more funds in the account to potentially grow and accumulate. That growth could help you take increased distribution amounts in the future to possibly manage rising living costs.
Ready to develop a plan to fight inflation in retirement? Contact us at Intelliplan Financial. We can help you create your strategy. Let’s connect today and start the conversation.
Citations.
1https://www.ssa.gov/planners/retire/retirechart.html
2https://www.ssa.gov/planners/retire/1943-delay.html
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