In retirement, one of the biggest challenges that people face is having their overall income keep up with inflation. According to the Department of Labor, over the last 25 years, the inflation in the United States — using the Consumer Price Index — has increased 71.7%, or roughly 2.2% annually. Someone who’s retired and living on a fixed income who has not benefited from the cost of living increases would only have 58% of their purchasing power 25 years later.
When we look at the sources of income, the majority of the retired Americans derive a good percentage of their income from Social Security. During the same 25-year period from 1995 through the end of 2019, Social Security has only averaged an annual increase. And in 2019, it was only 1.6% increase.
So, what is a retiree to do to try to keep up with inflation? Obviously, it’s going to vary from individual to individual.
But first, look at your overall income sources of income and determine if any of these sources are indexed for inflation. I shared with you Social Security has grown 1.75%, but does any of your pensions or other sources of income go up with inflation?
Do you have other income sources such as rental property and are they increasing with inflation? Second is to look at your overall portfolio. Do you have assets that historically have appreciated versus remained the same?
And third, look at your overall spending. Look at where you’re spending your money. Are there ways to cut some of the expenses as you get older? In other words, are there things like having two cars or belonging to certain clubs or going out to eat several times a week necessary?
The inflation changes year after year, but once we are retired, we need to be more conscious on how it affects our overall lifestyle.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.