Thank you for joining us for Episode 19 of our Money Wisdom Question Series, where we film answers to common financial and retirement investment questions. Today’s question is, “How does inflation impact retirement income?”
Indexed to Inflation
My grandfather came over here on a boat from Norway when he was 16 years old. When he retired, he received a pension and Social Security. Both were indexed to inflation. This means, that if he started with $1,000 a month of income, 10 years later he might have $1,300 or $1,500 a month. His pension and Social Security would go up. It helped him afford the things he needed to buy that were going up in price.
Living Longer & Inflation
Now what’s happening is, everyone is living longer. Somebody that retires today at age 65 has a good probability of living well into their 90s.
If you look back at what the cost of bread was in 1990, you could buy a pound of bread for 75 cents. By the year 2010, the cost had risen to $2.99, which is more than triple the cost in 20 years. However, a Toyota Camry didn’t go up as much in value because automobiles continue to see efficiencies, but other things people buy like medicine could go up in cost.
The point is, you may need to double or triple your income in retirement just to keep up with the cost of living. Again, people are living longer, and medicine is helping that, which means people need more money to spend on the things they want to buy.
Keep up with Inflation
It’s really important that your financial plan has a component in it to keep up with inflation and the cost of living. As the cost of goods and services increase that you buy in retirement, you need to factor in raises to pay for those items.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and want to learn more, get our free guide, “Retirement Income Strategies: How Do Interest Rates Play a Role?“
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