Make sure any retirement plan accounts for inflation

Steve Rohde is a financial adviser with Ameriprise Financial Services Inc. Courtesy photo

FALLBROOK – Today it’s common for Americans to spend two, three or even four decades in retirement. This extended period means people have ample time to relax and achieve a bucket list of dreams; however, the flip side is that retirees need to ensure they have enough savings to last through their lifetime. One complicating factor is that inflation is a fact of life, and it can result in meaningfully higher expenses over time.

Living costs increase even with modest inflation.

By historical standards, the impact of inflation on Americans’ expenses has been relatively low, rising less than 3% annually over the last quarter century. Yet, even modest inflation adds up. A 3% annual increase means living costs would double in less than 25 years. Consider this example: a retired couple planning to live on $60,000 in 1994 would require $103,842 today to maintain their standard of living.

Some costs can grow more quickly.

What this really means is that if someone is preparing for or is in retirement, they need to account for inflation, regardless of how modest it may be. And, while retirees should plan for inflation to affect all their retirement expenses, they can expect some costs to make a bigger impact in health care, housing costs and miscellaneous expenses.

As people grow older, it’s likely that they will require more medical attention. Health care costs are rising, which is affecting both out-of-pocket expenses and insurance premiums, including Medicare and long-term care policies.

By the time a person has reached retirement, they may have paid off their mortgage. But other expenses like insurance and property taxes can sometimes rise significantly, putting more stress on a retirement budget. If they plan to move to a different home, it might cost more than they expect depending on the real estate market in the area.

In retirement, day-to-day expenses such as groceries, gas and utilities bills, as well as travel and entertainment costs will increase – all of which can add up quickly.

There are steps people can take today to help prepare for the impact of inflation.

If there is still have time left before retirement, increase retirement plan contributions annually, own a tax-diversified retirement portfolio and keep working.

Recognize that living costs will rise throughout retirement, and consider boosting retirement savings each year. If possible, maximize contributions, or at least save enough to match the rate of inflation. Doing so will put those savings in a better position to manage higher costs in retirement.

Along with a tax-deferred workplace retirement plan, or IRA, focus on building savings in other vehicles including Roth IRAs and Roth 401(k)s if available that can potentially generate tax-free income in retirement. Any income that can be generated that is tax-free will reduce the total withdrawal amount since no taxes are due. That variety can help retirement savings last longer, according to Bureau of Labor Statistics, Consumer Price Index with dollar amounts determined using BLS Inflation Calculator found at

It is not the answer everybody wants to hear but staying at that job for a little longer than originally planned can help boost a nest egg and reduce the amount of time needed to live off savings.

After retirement, invest to keep up with inflation, understand all income streams and consider working in retirement.

While it’s important to take some risk off the table in retirement and move to more conservative investments, it is possible to be too conservative. At a minimum, retirees should make sure their investments are returning enough to keep pace with inflation. Depending on circumstances and retirement goals, they may want to continue investing a portion of the portfolio for growth.

Knowing what sources are available to draw from, such as a workplace retirement plan, IRA, annuities and Social Security – and which ones will used first – can help retirees make tax-efficient decisions that preserve their savings.

Returning to work may not be ideal, but if those savings come up short, working part-time or as a consultant can help solidify a financial picture.

Whether someone is preparing for retirement or if they have already stepped away from their primary career, it’s important to have a solid plan that realistically estimates their financial need for retirement – which means taking inflation into account. If they need help getting started or deciding if they need to adjust an existing plan, consult a local financial adviser.

Steve Rohde is a financial adviser with Ameriprise Financial Services Inc. in Fallbrook. He specializes in fee-based financial planning and asset management strategies. He can be contacted at (760) 645-3735, toll free at (833) 645-3755 and at 1114 South Main St. in Fallbrook.

Ameriprise Financial Services Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax adviser or attorney regarding their specific situation.

Submitted by Ameriprise Financial Services Inc.