How does inflation affect pension is a pretty common question. Retirees are primarily concerned about how inflation eats up their accumulated money over time. According to research, retirees who rely on retirement benefits for survival are likely to experience the worst in their golden years. Inflation makes the actual value of pension money go down a great deal. Even worse, nobody knows how long the current state of inflation will last.
Let’s take a closer look at how inflation can eat up pension schemes.
How Much Pension can be Lost to Inflation?
If you start putting down the actual figures that can be lost to inflation, you will be surprised. The numbers are startling! Inflation erodes many retirees’ benefits to an extent that could hurt all their retirement plans and strategies. For instance, an inflation rate of 1% can swallow more than $30,000 of your total benefits. And assume the inflation rate increases to 5%, an average retiree will lose up to $200,000.
Inflation Affects the Retiree’s Buying Power
Inflation rates greatly affect a Retiree’s purchasing power. Precisely, increase in the prices of goods and services leads to less purchases.
What most people don’t know is that seniors/retirees spend more than young adults. This is true because your expenses become more and more as you grow older. And for this case, retirees have a lot to cater for, starting from healthcare, housing, investments, travel, and many more expenditures.
A recent study found that more than 48% of retirees spend more money in the first three years of retirement than in their working years. This is proof that many retirees could be experiencing lifestyle inflation, and you can imagine how overwhelming it can get if goods and services increase in prices.
Shielding my Pension from Inflation
While there is no way a retiree can reduce inflation, they can come up with a plan on how they can curb the effects of inflation.
One smart move is to reduce their housing costs. Receiving vast sums of money as retirement benefits doesn’t mean you should get a more expensive apartment. It is good to downsize and find a cheaper one to save more. If you go for a mortgage, find one that you won’t have to pay for taxes, home owner’s insurance, and other fees.
Another good decision is to add more investments to your portfolio. They will cover up for the money you would have lost to inflation. Before investing, it is highly recommended to find a professional financial advisor to guide you through the process. Invest in something that will generate stable returns within a short time horizon, i.e., real estate, stocks, and much more.
Bottom Line
Inflation is a retirement enemy! But as long as you are well-prepared and have the right strategies, your golden years will be free from financial problems. You can estimate an inflation rate of 2% each year when putting up your retirement plans. Besides that, having a realistic budget, spending less, and investing more can be a good plan for beating inflation.
Similar Article: Managing Pension Risk as an Individual or Organization.
