To know whether or not you’ll outlive your money or if your money will outlive you requires answering 3 questions. To get caught up on question one read “Part 1: How Long Will You Live?” This month, we’re tackling the second question, which is, “How Much Will You Spend?”
In order to maintain the same lifestyle throughout the average length retirement, you need to be prepared to spend 2.5 times more at the end than what you did at the beginning. That’s just assuming we have average inflation. If inflation is higher, like it has been in recent years, or you enjoy a longer than average retirement you’ll need to spend even more.
While Social Security does increase with inflation each year, the government unfortunately uses what is called CPI-U, which measures what the average price increases are for a general basket of goods and services of all urban consumers. The government also tracks CPI-E, which measures what the inflation those 62+ are experiencing on the general basket of goods and services they buy. CPI-E has been much higher than CPI-U and that means that Social Security payments haven’t increased as much as what prices have for those that are receiving them.
The government could easily fix this problem and use CPI-E, but thus far have chosen not to likely because it would mean higher payouts from a Social Security system that is already facing financial issues. Even if this change was made, many would still lament that oftentimes most of their Social Security pay increases are eaten away by Medicare cost increases.
While some pensions do have COLAs or cost of living adjustments, they typically have the same issue as Social Security does in using the wrong measure of inflation that doesn’t keep up with the price increases retirees face. Most pensions don’t have this feature, though, and that means that every single day the amount you receive buys less and less.
Inflation is the silent thief of retirement. Nearly half of retirees in a recent study done by Kiplinger reported their expenses are higher than expected. Having a plan to have ever increasing income to defeat ever increasing prices is critical if you don’t want to experience an ever decreasing lifestyle. Something that costs $100 today will cost $250 at the end of your retirement. To put it another way, $100 at the end of your retirement will only buy the same as what $40 does today. It is probably scary to think about having to cut your spending by 60% over the course of retirement. That is what you’ll have to do, though, if you maintain the exact same income throughout.
Don’t let inflation steal your retirement. Schedule a complimentary meeting with our team at Retirement Portfolios and together we’ll create a plan to help you overcome inflation and maintain the lifestyle you’ve worked so hard to achieve throughout retirement.
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