Don’t let inflation derail your retirement


At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

It’s not enough just to save for retirement. You also need to make sure your money lasts once you quit working.

How long you stretch those dollars depends on variables such as your age at retirement, your health and inflation. A healthy lifestyle and savvy career maneuvering can help you manage the first two challenges. But many people don’t pay enough attention to inflation, says Steven Kaye, CFP and founder of AEPG Wealth Strategies.

“Most people have some understanding of the basic definition of inflation. They may know a loaf of bread will cost $10 one day,” says Kaye. “But because inflation comes in very tiny doses — just 2 percent to 3 percent a year — most people don’t fully appreciate its impact.”

Loaf of bread once cost a nickel

Historically, inflation has clipped along at an annual 3-percent pace, on average. That means if you currently live on $50,000 a year, in 30 years you’d need around $121,000 annually.

What do you do about price hikes? Plan conservatively, says Dee Lee, author of “Let’s Talk Money.” She advises clients to assume inflation will grow higher than traditional averages — at least 4 percent annually.

“In retirement, the very goods and services we need as we age increase much faster than the normal inflation rate,” Lee explains. “Health care, for example. The flat-screen TV and the new computer have come down in price, but the costs of medication and tests have increased.”

Hedging your bets by boosting inflation expectations can help save you from sinking into a huge financial hole. Take that $50,000 you spend today. If prices rise 4 percent a year instead of 3 percent, you will need $162,000 to get by in 30 years.

Thankfully, you don’t have to be a math whiz to run the numbers to see where you’d stand under different inflation scenarios. Bankrate’s online retirement-planning calculator allows you to factor in different rates of inflation when setting savings targets.

Effects of inflation on someone who lives on $60,000 a year

What you need if inflation rises: 3% 4% 5%
Today $60,000 $60,000 $60,000
10 years $80,400 $88,800 $97,800
20 years $108,600 $131,400 $159,000
30 years $145,800 $194,400 $259,200

Source: CCH Financial Planning ToolKit

Hedges against inflation

Real estate has long been touted as a great inflation hedge. Trouble is, you still have to live somewhere in retirement. You may be able to downsize or relocate, but Kaye cautions against viewing your home as a foolproof inflation guard. “Real estate has (traditionally) gone up about 3 percent a year,” he adds. “It’s not nearly as much as people think.” And, of course, most homeowners remember the inflated values that led to the crash of the housing market beginning in 2008.

Investing in commodities, such as oil or metals, has typically been one way to safeguard against inflation because these goods are limited and therefore will grow in value. Kaye recommends diversifying against risk by buying a diversified-index fund that isn’t focused on any single commodity.

Treasury Inflation-Protected Securities, or TIPS, are government-backed bonds that are guaranteed to beat inflation. You can buy TIPS from the Treasury Department or through a mutual fund company. But be aware that you’ll owe taxes on interest, so TIPS may be best suited for a tax-favored account.