The risk of inflation to your retirement security and legacy goals?

Wow...there's a lot of talk about inflation lately. So far, there's not much more to talk about than the talk:

The story is that the economy is set to boom with the availability of vaccinations. The pent-up demand from over a year of deprivation sets the scene for bursting consumer demand.

Although the Federal Reserve under Chair Jerome Powell has been appropriately dovish during the pandemic, I have no doubts that the Fed would have no qualms about raising interest rates if core inflation persisted above four or even three percent.

Nonetheless, let's consider the risk of inflation on your retirement security and legacy goals.

During the accumulation years, you can - the theory goes - fight inflation by demanding a higher wage to compensate for the higher costs you face. However, to be perfectly honest about where I'm coming from, I have my doubts:

So, theoretically, when you are working during an inflationary period, you can either demand that your employer pay you more, or find a new job at a wage that will compensate you for your higher costs. However, during your retirement years, you likely your nest egg in the form of a 401(k) or IRAs. Unless you are willing and able to take on some part-time or full-time employment during your retirement, you face the prospect of higher costs and a source of income that is shrinking in purchasing power.

Fighting Inflation in Retirement

First, a significant part of your retirement income floor will likely come from Social Security. Social Security undergoes a Cost of Living Adjustment (COLA) annually to maintain the benefits' purchasing power for recipients. So, during an inflationary period in your retirement, you have to worry most about the gap between your Social Security income and your essential spending requirements. That makes the potential problem a bit less daunting.

For example, if you have a household Social Security benefit of $50,000 per year, an essential spending requirement of $90,000 per year, you need to make up the $40,000 gross gap from your retirement savings. If that savings is $1,000,000, then you're taking a 4% withdrawal. If inflation is running at 4% a year for a year or two, you might increase that by withdrawal by that inflation rate: so, an additional $1,600.

The best risk of inflation protection in retirement occurs before retirement. You can save more, by investing smarter and taking advantage of tax laws to increase your nest egg. In addition, each year until 70 that you delay claiming Social Security, you add 8% to your annual benefit. Those COLAs added onto a higher baseline Social Security benefit sure do pay off.

If you want further protection against inflation, you could use some of your retirement savings to purchase an inflation protected annuity. This would boost your essential spending floor above and beyond Social Security.

If the idea of an annuity rubs you the wrong way, investing in equities provides some inflation protection up to a point.

In addition, retirements tend to fall into three phases. During the "Go-Go" years, 62-70, retirees tend to splurge on traveling, activities and hobbies. During the "Slow-Go" years, 70-80, retirees spend less on travel and more on medical care. During the "No-Go" years, 80-100+, retirees tend to spend less and less on discretionary purchases and more on medical and personal care. Medicare and health insurance will cover some of the medical care in the latter two phases. If you have long-term care insurance, you can avoid much of that cost as well.

Given that perspective, inflation in retirement is put in greater context. Much of the non-core inflationary pressures on fuel and food could be defanged by the latter two phases when discretionary travel and dining tend to decline in any case.

To achieve your retirement security and legacy goals, you need an attorney who creates a Wealth Plan for you with an understanding of your unique goals and concerns, contextualized within broader economic trends. By employing the tools and strategies of the 1%, the Law Office of Zachary D Kamykowski, PLLC provides the 99% with a greater chance of defeating the spectre of inflation - even if for now, it is only that.