Your retirement may last thirty years. Over a period of ten or fifteen years, moderate inflation ( 3-6% per year) can severely reduce your wealth and security. My task, as a financial planner, is to help people understand, plan and act to protect themselves.
Retired, we are especially vulnerable to inflation. We are no longer in the accumulative phase of our lives; our assets and their earnings are what we must use for the rest of our lives. We aren't making the wages that will adjust to the cost of living. Many of us will depend on fixed-income from bonds or annuities. This leaves our income stable while increasing our expenses.
Our spending changes. We spend more and more on services instead of goods. We travel, spend more on medical services, or pay someone for home repairs rather than get up on that roof. Personal services can inflate at a higher rate than goods. Political and economic trends imply higher taxes and fewer public services. Both affect retirees disproportionately.
Medical costs are the poster child for sustained inflation. In 1969 I was hospitalized with pneumonia for three days. My total bill was $110, roughly two weeks' work at the federal minimum wage. Now, it would be four to six months' of work at the minimum wage. That is inflation.
Medical cost increases are a good demonstration how sustained, moderate inflation can affect out world, causing real pain to many people.
The effect are profound and widespread. Doctor co-pays were minimal or absent twenty five years ago. State coffers have been drained by rising Medicaid expenses. Medicare's rising costs will cause a substantial decrease in government services, much higher taxes, or both. As a nurse, I saw patients who could not afford primary care; hypertension or diabetes could go untreated with tragic results. Medical costs are a leading cause of personal bankruptcy.
These are all the effects of sustained inflation.
Fortunately, retirees have some protection. Social Security benefits are linked to the Consumer Price Index, however the CPI may underestimate the inflation retired people face. Washington State's Public Employees Retirement System has a inflation adjustment capped at 3%. This may not be enough. Inflation of 3-6% per year has been normal since WWII. Swedish Hospital's Pension, like most private pensions (and annuities) have no inflation adjustment.
Just five years of 5% inflation means $1 becomes worth only 77 cents at the cash register.
Inflation can endanger your security in retirement. Here are some ideas on protecting yourself.