Inflation — Plan for Declining Purchasing Power
We all know from experience that prices will likely go up over time; that is why retirees need to consider inflation when planning for their lifelong sustainable income. The following chart shows the impact of inflation on our purchasing power over time:
Value of $1.00 After Reflecting Effects of Inflation
For example, consider a retirement income plan that starts at $15,000 per year and then increases by 3% each year to anticipate inflation. The chart shows that in year 15, for example, the income payment would have to be increased by about 50% (i.e., to about $22,500) over the starting amount.
There are ways to anticipate inflation which involve holding assets that over time can be expected to keep pace with inflation. We will not comment on them, except to say:
- Inflation in retirement needs to be anticipated.
- Retirement assets need to be dedicated to providing the growth necessary for withdrawals to at least keep pace with inflation.
- Some income annuities can serve this purpose, because they offer options to increase income payments to cover inflation. Other alternatives to cover inflation could be investments like Treasury Inflation Protected bonds.