Impact Of Inflation On Retirement Savings
Inflation is the general increase in prices and a fall in the purchasing power of money over time. The average inflation rate in the United States for the past 30 years has been around 2.6% per year, which means that the purchasing power of one dollar now is not only less than one dollar 30 years ago but less than 50 cents! Inflation is one of the reasons why people tend to underestimate how much they need to save for retirement.
Although inflation does have an impact on retirement savings, it is unpredictable and mostly out of a person’s control. As a result, people generally do not center their retirement planning or investments around inflation and instead focus mainly on achieving as large and steady a total return on investment as possible. For people interested in mitigating inflation, there are investments in the U.S. that are specifically designed to counter inflation called Treasury Inflation-Protected Securities and similar investments in other countries that go by different names. Also, gold and other commodities are traditionally favored as protection against inflation, as are dividend-paying stocks as opposed to short-term bonds.
Our Retirement Calculator can help by considering inflation in several calculations. Please visit the Inflation Calculator for more information about inflation or to do calculations involving inflation.
Try This If You Arent Sure If It Is Time To Retire
Some of us cant wait to retire and do so as early as possible. Others are not so sure about life without work. Reluctant retirees might be worried about money or they might be concerned that they will just really miss work. The fear of missing out can be strong for both work and leisure.
If you want a happy retirement, you need to leave the workforce at the right time for you.
Will The Retirement Age Increase Or Change
The retirement age will in all likelihood someday be raised above 65. In 2012, then Prime Minister Stephen Harper announced that between 2023 and 2029, retirement age would be raised to 67, to put it in line with changes or planned retirement age hikes in Australia, Britain, the United States and many other countries, which were raised to account for increasing lifespans of Canadians. In 2015, as soon as he was elected, Prime Minister Justin Trudeau cancelled Harpers plans. Considering articles like this one, arguing that 65 places a too great economic strain upon our government, its quite likely that any new administration will again consider raising retirement age to 67 or even higher.
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Top 5 Fixed Income Investments For Retirement Planning
If you are someone who depends on interest income and is feeling the pain of the ever-decreasing FD rates, we have a solution for you to ensure a steady cash flow in your retirement. ET Online’s Shambhavi Mehrotra tells you the five best fixed income options and how you can make the most of them for your interest income. Watch now.Top 5 fixed income investments for retirement planning
Retirement Plans For Self
If youre self-employed or own a small business, you have some further options for creating your own retirement plan. Three of the most popular options are a solo 401, a SIMPLE IRA and a SEP IRA, and these offer a number of benefits to participants:
- Higher contribution limits: Plans such as the solo 401 and SEP IRA give participants much higher contribution limits than a typical 401 plan.
- The ability to profit share: These plans may allow you to contribute to the employee limit and then add in an extra helping of profits as an employer contribution.
- Less regulation: These retirement plans typically reduce the amount of regulation required versus a standard plan, meaning its easier to administer them.
- Investible in higher-return assets: These plans can be invested in higher-return assets such as stocks or stock funds.
- Varied investment options: Unlike a typical company administered retirement plan, these plans may allow you to invest in a wider array of assets.
So those are some of the key benefits of retirement plans for the self-employed or small business owners.
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Follow The Lessons Of Healthy 90 Year Olds
UC Irvine is heading a celebrated research project that is documenting what factors determine who will live past age 90. Here are some of their findings:
- Smokers die earlier than nonsmokers
- People who exercise live longer than those who do not. As little as 15 minutes a day makes a difference. Forty five minutes a day is best.
- Nonphysical activities are also important. Think book clubs, meeting friends for coffee, crossword puzzles.
- Vitamins do not seem to make a difference.
- Moderate alcohol consumption is associated with living longer. Up to two drinks a day leads to a 1015 percent reduced risk of death.
- Coffee is good too 13 cups a day.
- Gain a little weight people who are average or slightly overweight seem to live longer than those who are underweight.
If you want to know more about this retirement research, 60 Minutes did an excellent report on Living to 90 and Beyond.
Check How Much You’ve Saved
Its easy to find out how much youve got in your pension savings with us.
Simply log on to your online account and look at your fund value summary.
If youve got pension savings with other employers or personal pensions, you should get a statement each year showing: the value of your current savings, and how much your pension could be at your chosen retirement age.
If you think youve got an old pension but have lost the details, you can use the governments Pension Tracing service to find it.
You can use the Money Advice Services pension calculator to help you add it all together.
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Assess Risk Tolerance Vs Investment Goals
Whether its you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and return objectives is arguably the most important step in retirement planning. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free Treasury bonds for required expenditures?
You need to make sure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. Dont be a micromanager who reacts to daily market noise, advises Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio in Springville, Utah. Helicopter investors tend to overmanage their portfolios. When the various mutual funds in your portfolio have a bad year, add more money to them. Its kind of like parenting: The child that needs your love the most often deserves it the least. Portfolios are similar. The mutual fund you are unhappy with this year may be next years best performerso dont bail out on it.
Our Top 5 Stocks For Investors 50 Or Older Now Available
For a limited time, The Motley Fool Australia is giving away an urgent new investment report outlining our 5 favourite stocks for investors over 50. Each company boasts strong growth prospects over the next 3 to 5 years, and most importantly each pays a generous dividend! So if youre looking to get your finances on track and youre in or near retirement weve got you covered!
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What Is The Best Investment Strategy For Retirement
Many workers have both a 401 plan and an IRA at their disposal, so that gives them two tax-advantaged ways to save for retirement, and they should make the most of them. But it can make sense to use your account options strategically to really max out your benefits.
One of your biggest advantages is actually an employer who matches your retirement contributions up to some amount. The most important goal of saving in a 401 is to try and max out this employer match. Its easy money that provides you an immediate return for saving.
For example, this employer match will often give you 50 to 100 percent of your contribution each year, up to some maximum, perhaps 3 to 5 percent of your salary.
To optimize your retirement accounts, experts recommend investing in both a 401 and an IRA in the following order:
Pay Attention To How Much Of Your Paycheck Gets Contributed To Your 401
Many employers automatically enroll employees in 401 plans at a certain contribution rate. This means that once you begin working at that company, a percentage like 3%, for example will be automatically deducted from your paycheck and put into your 401.
This can be a great way to help employees start saving, especially since it’s easy to get bogged down by other aspects of onboarding when you just start a new job. However, Young cautions against taking a passive role when it comes to how much of your paycheck gets contributed to your 401.
“It’s good that companies auto-enroll people but if it’s a low contribution level, it’s probably not enough for most people,” he said.
Plan to speak to HR for steps for figuring out how much you’re currently contributing and how to change your contribution percentage if it doesn’t suit you. Also make sure you’re contributing enough to receive your employer match.
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Points To Ponder: How Nris Can Get Their Retirement Math Right
After all the affluent lifestyle spending, many NRIs do not have a lot of savings and investments left as far as an equally affluent retirement is concerned. This doesnt mean that they dont have a substantial corpus. It just means that the corpus is not sufficient for supporting the affluent lifestyle that they are used to in their retirement.
How To Invest When Youre Approaching Retirement
As you might have discovered upon ever mistaking your partners jeans for your own, everyone is different. If youre among the vast majority of people who will be spending your life savings during retirement, youll want to make sure that your moneys actually available when you need to access it.
The general rule is that as you start approaching retirement, youll want start bringing down the level of risk in your portfolio. You don’t want your accounts fluctuating significantly in value as you’re drawing down some of the capital from your portfolio. – Mike Allen, Portfolio Manager, Wealthsimple
So, about ten years out, youd likely want to consider how to switch out some equity investments for something less volatile, like bonds.
But its worth considering three popular approaches to asset allocation, the flight path model, the age-in-bonds model, and the aggressive model, all three of which are compared here.
Not all investors will want to take their foot off the gas of equity growth in favor of more secure alternatives. We see many clients that are retired that have more than enough money to live off for the rest of their life, Allen says. They often want more of a growth focused portfolio to continue allowing their estate to grow throughout their decades of retirement.
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Using Your Home To Boost Your Retirement Income
If you own your home, are nearing retirement, and are worried about your retirement account balance, you may be able to leverage the value of your home to generate extra retirement income.
By assuming a reverse mortgage, a lender would make mortgage payments to you in exchange for the equity in your home. Reverse mortgages aren’t for everyone, but theyre certainly worth exploring for homeowners who are evaluating their retirement plans.
Expert Take: Estate Planning Is A Crucial Part Of Retirement Planning
Besides investing, just as important a part of your retirement planning is estate planning. Many tend to overlook succession planning and leave it for the last minute. Here are the steps you need to take along with limitations you may face and how you can overcome them.Expert take: Estate planning is a crucial part of retirement planning
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Think Health Not Wealth
According to an AgeWave study, more than 80% of todays retirees say health is the most important ingredient for a happy retirement, meaning that the majority value good health even over financial security.
So, the best retirement plan involves not just your finances but also ways to stay mentally and physically healthy. Gardening, walking, joining a gym, and eating healthy are all proven ways to stay physically healthy. Staying vital, having a purpose, and challenging yourself mentally are great ways to maintain your mental health.
Additionally, it is important to plan for how to fund healthcare costs. Americans age 50+ cite health care costs in retirement as their greatest financial concern, regardless of their wealth level. Yet the vast majority of people have not factored these costs into their retirement planning.
Use the NewRetirement Planner to get a personalized estimate of your lifetime healthcare costs and make sure you are covered.
Track Your Expenditure Before You Retire
How much you spend in retirement will vary as you move through the different post-employment stages. Having an idea of expenditure levels will certainly help you to plan for the longer-term.
Youre likely to have less money to live on than previously, but you may be mortgage-free and travels costs related to work will disappear.
Our guide highlights three levels of spending for essentials, a comfortable retirement and a more luxurious lifestyle.
Find out more in our guide to how much will I need to retire?
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How Much Money Do You Really Need To Retire
You may be wondering what dollar amount will be enough money to comfortably retire. Unfortunately, there’s not a one-size-fits-all number. To estimate how much money you personally need to retire, follow these basic steps:
Understand Your Time Horizon
Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time from today to retirement, the higher the level of risk that your portfolio can withstand. If youre young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks. There will be volatility, but stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is long, meaning at least more than 10 years.
Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree, says Chris Hammond, a Savannah, Tenn., financial advisor and founder of RetirementPlanningMadeEasy.com.
Weve all heardand wantcompound growth on our money, Hammond adds. Well, inflation is like compound anti-growth, as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesnt seem like much each year, but given enough time, it has a huge impact.
You might not think that saving a few bucks here and there in your 20s means much, but the power of compounding will make it worth much more by the time you need it.
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Save 15% Of Your Income
Invest 15% of your gross income in good growth stock mutual funds through tax-advantaged retirement savings plans like your employers 401 and a Roth IRA. At Ramsey, we love Roth IRAs and Roth 401s because the money you invest in them grows tax-free and you wont be taxed when you take out money in retirement.
Your goal is to consistently invest for retirement as you focus on other financial obligations, such as funding college for your kids or paying off your home early. With an empty nest and a paid-for home, you can plan to ramp up your retirement savings later if you need to.
A couple with a household income of $56,000 could have around $1.1 million for retirement if they invest 15% of their income for 25 years. In 30 years, they could have $1.9 millionand thats assuming they never got another raise during their working lifetimes.
Ideally, you should be able to live off the growth of your retirement savings rather than dipping into your nest egg. A financial advisor can run projections based on your monthly contributions and expected retirement age, making sure to account for inflation and any taxes or fees that may apply down the road.