Inflation Rate To Use For Retirement Planning


A Tiny Difference In Return Can Mean A Lot

Planning for retirement amid sky-high inflation
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My wife and I had our photo taken standing in front of a 1,000-year-old Sitka Spruce tree, and this got me thinking about the impact of 1,000 years of growth.

I can barely get my mind around a concept of the time that tree began its life, presumably around the year 1020. What was life like back then? Did anybody notice that tree when it was young?

Most likely well never know.

Still, my curiosity was now aroused, and I found an online site with lots of information about inflation. That topic doesnt directly apply to a tree, but it certainly applies to investors.

When I came into the world as an adult, U.S. inflation was very low. To me, the 1953-1966 inflation rate of 1.5% was normal. Something that I could have purchased in 1953 for $1 would have cost about $1.21 in 1966. By then, my ability to spend money had escalated mightily, so it didnt seem like a big deal.

As a result, I was in no way prepared for the next 14 years. From 1967 through 1980, the inflation rate was 7.1%. By 1980, that mythical item which I could have acquired for $1.21 in 1966 would have cost $3.08.

From 1926 through 2019, inflation in the United States and other developed nations has been roughly 3%, so at the moment it seems to make sense to regard that as a reasonable long-term expectation for the future.

Scanning the table, youll find some interesting data points.

How Much Should You Be Worried About Inflations Impact On Your Retirement Income Plan If You Plan Right You Shouldnt Have To Worry At All

Right now, inflation is top of mind for everyone, perhaps especially retirees.

Inflation is important. But it is only one of the risks that retirees have to plan for and manage. And like the other risks you have to manage, you can build an income plan so that rising costs do not ruin your retirement.

Adjusting Your Portfolio For Inflation

Since inflation affects different asset classes in a variety of ways, diversifying your portfolio can help ensure that your real returns remain positive, on average, over the years. But should you adjust your portfolios asset allocation when inflation changes?

Gahagan says no because people are likely to make tactical errors based on the news and fears of the day. Instead, investors should develop a sound, long-term strategy. Even in retirement, we usually don’t invest for the short term. For example, at age 65, were investing for the next 25 to 35 years or longer. In the short term, any number of unfavorable things can happen, but over the long term, these things can balance out, he says.

The same guideline that applies during your working yearschoose an asset allocation appropriate for your goals, time horizon, and risk tolerance, and dont try to time the marketapplies during your retirement years. But you do want to have a diversified portfolio so that inflation doesnt have an outsize effect on your portfolio during a particular period.

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Managing The Risk Of Inflation What Are The Options

  • Consider a retirement income stream that helps protect the value of your savings from inflation, such as a Challenger lifetime annuity. Challengers lifetime annuities provide different monthly payment solutions to suit your financial circumstances and needs. For income certainty, you can choose CPI indexed or fixed payments. Alternatively, you can choose to have payments linked to changes in the RBA cash rate or investment markets.
  • 5 Martin PlaceSydney NSW 2000

Challenger Life is not an authorised deposit-taking institution for the purpose of the Banking Act 1959 , and its obligations do not represent deposits or liabilities of an authorised deposit-taking institution in the Challenger Group and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Challenger Life. Accordingly, unless specified otherwise, the performance, the repayment of capital and any particular rate of return on your investments are not guaranteed by any Challenger ADI.

Treatment Of Inflation In Retirement Planning Calculations: An Improved Method

Average Inflation Targeting

Journal of Financial Planning:

Sherman D. Hanna, Ph.D., is a professor in the Human Sciences Department of The Ohio State University. He received a bachelors degree in economics from the Massachusetts Institute of Technology and a Ph.D. in consumer economics from Cornell University. He has published in numerous journals and was the founding editor of the Journal of Financial Counseling and Planning.

Kyoung Tae Kim, Ph.D.,is an assistant professor in the Department of Consumer Sciences at the University of Alabama. He received a bachelors degree in economics and a Ph.D. in consumer sciences from The Ohio State University, and a masters degree in economics from Purdue University. He has published in Applied Economics Letters, Financial Services Review, Journal of Poverty, and Journal of Personal Finance.

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How Inflation Eats Away At Your Retirement Income

  • Wage-Price Spiral
  • Inflation is something most Americans probably don’t think about much, but it has a significant influence on their financial lives. Not only does inflation affect the prices of consumer goods, but the federal government also uses it as a benchmark in determining whether to increase contribution limits to qualified retirement plans or to raise monthly Social Security benefits.

    On an individual level, the inflation rate affects how much your retirement dollars will really be worth. Over time, it can take a serious bite out of your nest egg. Understanding how inflation may hurt your retirement strategy is a must for ensuring that you have enough assets to last through your later years.

    Dont Reinvent The Wheel

    If you and your wealth advisor determine that a change needs to be made, it doesnt mean you need to tear up the original plan and start from scratch. Rather it may just require some minor tweaking to your plan, your savings goal and/or the time it will take you to achieve that goal.

    For example, if you know where and how you want to live in retirement, your wealth advisor can calculate how inflation will impact your anticipated housing and lifestyle costs to determine the new monthly cash flow required to support it.

    Also Check: How Much Is Social Security Taxed In Retirement

    Why Will Asia Be Hit The Most By Us Inflation

    In my earlier article, I explained that the US currency and interest rate policy has a direct impact on Singapore. If you are paying a mortgage loan, you will realize that your loan repayment has dropped a lot lately. That is because since the US cut its interest rate aggressively, Singapores lending rate SIBOR has crashed correspondingly.

    Have you ever wondered why the EURO was born? Because the European countries wanted to get out of the dollar system and prevent such things from happening to them.

    In the past decade, the world has been busy with de-dollarization. But Singapore, which has to keep an open economy, has little choice. Singapore and many other Asia countries have high US dollar reserves. It means that we are vulnerable to the USs internal monetary policy. The countries that will be most affected are the countries that have the highest US dollar reserves.

    You can see from the chart below that Asia Pacific countries have much higher foreign currency reserves than other parts of the world.

    From the US perspective, they do what they need to do. But Asia will quickly feel the impact when the US inflation kicks off.

    And Remember: Life Throws Curveballs

    Overcome Recession and Inflation with Retirement Plan Financing

    With inflation, appearances can be deceiving, because short-term, single-digit increases dont seem that steep. Even though consumer prices dipped during the pandemics first wave, they escalated as businesses began to reopen this year, widespread supply chain issues emerged and many people headed back to work.

    Excluding volatile food and energy costs, the Consumer Price Index rose 4.6 percent in October from a year earlier, the highest increase since 1990. That compares with an average of roughly 3 percent between 1913 and 2020, with notable surges in the 1970s and the 1980s .

    No matter how you view inflation, you will need to buffer the cost of living and unforeseen preretirement financial shocks such as job loss, divorce and out-of-pocket medical expenses, which certainly make retirement planning even more challenging. A study by the National Endowment for Financial Education showed that 96 percent of Americans experienced four or more such income shocks by the time they reached age 70.

    How do you avoid the triple threat of inflation, income shocks and outliving your nest egg? Working with a fiduciary fee-only certified financial planner who can diversify your retirement portfolio with low-cost index funds is a start, Ms. Johnson said. Such a planner will charge you a flat fee or hourly rate based on how much work you need. Dont work with financial advisers, brokers or agents who charge commissions.

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    Inflation And Retirement Planning

    Back in 1965 if you have $140,000 in the bank you would have been a millionaire by todays standards. From 1965 to 2011, the average annual inflation rate was 4.39%.

    Lets face it, the purchasing power of $1 thirty years ago is different that today. I remember as a kid, my sister and I could go into a store with one dollar and get 2 chocolate bars, a bag of chips and a handful of double bubble. Today, if I took two of my kids into the store I could barely get out with just a five dollar bill for those same items.

    In 1965:a loaf of bread cost you 27 centsa litre of milk was 31 centsgas for your car was about 10 cents per litreThe average car was 2500and my dad bought our starter home for a little over $10,000

    Today that same loaf of bread is about $2.50a litre of milk is $2.60gas for your car is about $1.06 cents per litreThe average new car is over $30,000and to buy an average home in Alberta is about $350,000

    Predicting inflation is like predicting the stock market or interest rates or housing prices but one thing I know for sure is the cost of living will increase so when it comes to financial planning and retirement planning it is so important to factor inflation into the picture. If you dont you will not be accounting for the changes in the value of money because of the rising goods. If you think $1 million is enough to retire by todays standards, that $1 million will not be worth the same 10, 20 or 30 years from now.

    How The Inflation Calculator Works

    Many of the online inflation calculators, such as the Inflation Calculator on are based on the historical values for the Consumer Price Index . These are useful for historical comparisons, and you can also look at historical inflation rates to help you decide on what rate to assume for the future.

    The above Inflation Calculator is allows you to make predictions about the future based on any inflation rate that you specify. It uses formulas similar to the PV and FV formulas in Excel.

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    Government Benefits Generally Dont Keep Pace

    The Age Pension and allowance rates are indexed twice a year to help retiree incomes keep pace with rises in living costs. Indexation of the Age Pension rate is linked to movements in prices and wages, while allowance rates are linked to the CPI.

    Although this sounds good, it doesnt mean full and part age pensioners are completely protected against the impact of inflation. Many observers believe the twice-yearly cost of living adjustments to the Age Pension dont fully compensate retirees for the impact of inflation. Its important to remember Age Pension increases lag any rise in prices, as your fortnightly payment only increases after the ABS has declared the inflation rate for the two preceding quarters.

    According to research by the South Australian Council of Social Service , over the year to June 2021, the living cost index for SA age pensioners rose by 2.3%, compared to the generic CPI rise of 3.8% nationally and 2.8% in Adelaide. The 20 March 2021 increase in the fortnightly Age Pension rate, however, was only 0.9% for single age pensioners .

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    Although the percentage difference is not large, over time age pensioners definitely feel the impact of inflation on their household budget.

    SACOSS calculated the jump in inflation and the lag in indexation of the Age Pension during this period left a single age pensioner $6.66 a week worse off than in the previous year.

    Current Risk Of Inflation

    FREE 11+ Sample Inflation Calculator Templates in MS Word ...

    In 2011, the risk of inflation is fairly high. The current economic outlook for the United States is not very good. As private sector unemployment remains high, federal, state, and local governments take in less money to provide services. Further, federal and state governments are burdened with paying unemployment insurance. As less tax revenue comes in, services are reduced. As services are reduced, public sector employees are laid off.

    The biggest problem for the US right now, however, is the massive budget deficits at both the federal and state levels. The federal government has been able to continue selling bonds to other countries in order to finance ongoing operations, but the total amount of estimated outstanding US debt as of May 2011 is over $14 trillion.

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    Inflation: Nominal Vs Real Returns

    Over long periods, inflation has averaged about 3% per year, but in any given year or period, it can be much higher or lower than that. In 2015, for example, it averaged close to 0%, while it was 6% in 1982, 9% in 1975, and more than 13% in 1980.

    When it comes to investing, and to estimating how much money we’ll have in the future, it’s common to overlook inflation and its effects. When you read, for example, that the stock market has averaged annual returns of close to 10% over many decades, that’s not including inflation. That’s what’s called a “nominal” return, as opposed to a “real” return, which does incorporate inflation.

    Check out the following data from Wharton Business School professor Jeremy Siegel, who has calculated the average returns for stocks, bonds, bills, gold, and the dollar, between 1802 and 2012 — yes, more than 200 years! He offers his results in both nominal and real terms:

    Asset Class


    Source: Stocks for the Long Run, by Jeremy Siegel.

    Clearly, inflation really shrinks one’s results. Ignoring its effects puts you at risk of not having saved enough for retirement.

    Managing Inflation In Real Time

    Whether you build your plan around 2.0%, 2.5% or even 3.0%, it is helpful to realize that any short-term inflation rate will not match your plan assumption. My view is that you can adjust to this short-term inflation in multiple ways.

    • Where possible, defer purchases that are affected by temporary price hikes.
    • Where you cant defer purchases, use your liquid savings accounts to purchase the items, and avoid drawing down from your retirement savings.
    • If you believe price hikes will continue, revise your inflation assumption and create a new plan. Of course, monitor your plan on a regular basis.

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    Key Risks That A Retirement Income Plan Should Address

    A good plan for income in retirement considers the many risks we face as we age. Those include:

  • Longevity risk. To help reduce the risk of outliving your savings, Social Security, pension income and annuity payments provide guaranteed income for life and become the foundation of your plan. As one example, you should be smart about your decision on when and how to claim your Social Security benefit in order to maximize it.
  • While occasional corrections in financial markets grab headlines and are cause for concern, you can manage your income plan by reducing your incomes dependence on these returns. By having a large percentage of your income safe and less dependent on current market returns, and by replanning periodically, you are pushing a significant part of the market risk to your legacy. In other words, the kids may receive a legacy that reflects in part a down market, which can recover during their lifetimes.
  • Inflation risk. While a portion of every retirees income should be for their lifetime and less dependent on market returns, you need to build in an explicit margin for inflation risk on your total income. The easiest way to do that is to accept lower income at the start. For example, under a Go2Income plan, our typical investor can plan on starting income of $114,000 per year under a 1% inflation assumption. It would be reduced to $103,000 under a 2% assumption.
  • How To Protect Against Inflation In Retirement

    How Inflation Affects Your Retirement: Retirement Report – P.3

    If inflation concerns you too, there are certain investments you can make that are inflation hedges.

    Common investments that help protect against inflation are TIPS bonds, some commodities, and real estate rentals.

    Fortunately, TIPS, real estate, and commodities are easy to add to a retirement portfolio through ETFs.

    We found owning real estate rentals to be good long term investments as well as good inflation hedges.

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    Let Social Security Help

    People love to knock it, but Social Security is still a major part of most Americans retirementabout half of retirees rely on Social Security for more than 50% of their retirement income. It comes with a built-in cost of living increase based on the published inflation rate, and despite much being written about the potential drying up of the Social Security trust fund, its still estimated to provide at least 70% of expected benefits if or when it runs out of cashand thats without any legislative changes. All of that helps.

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