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The fifth retirement mistake to avoid is neglecting to address inflation. As of October 2022, the annual inflation rate is around 8%, though this rate isn’t expected to persist. Nevertheless, inflation can erode your retirement savings if not managed effectively.
For instance, if you need $50,000 from your portfolio each year and inflate that amount at a more typical rate of 3%, after ten years, that $50,000 will have the same purchasing power as $67,000 today, marking a 34% increase. Extrapolating over 30 years, that $50,000 will become $120,000.
To combat inflation, it’s crucial to prepare your retirement investments so that they can keep up with the cost of living adjustments in the future.
The fifth biggest mistake to avoid in retirement is not addressing inflation. At the time of recording here in October of 2022, the annual inflation rate sits at just about 8%. And while we don’t anticipate that rate continuing too far into the future, inflation can eat into your portfolio if it’s not addressed properly.
For example, if you needed to spend $50,000 from your portfolio every year, if we inflated that $50,000 at a more average inflation rate, typically around 3%, if you take that $50,000 and you inflate it 3% for ten years, that $50,000 is going to be worth the same as $67,000 will be worth in ten years.
So that is a 34% increase just to maintain the same purchasing power as that $50,000 would feel like today. And the longer we extrapolate that, for example, if we take that $50,000 number and inflate it 3% for 30 years, that $50,000 is actually going to be worth $120,000 in 30 years.
So how do we address inflation in your financial plan? Well, it goes back to preparing your retirement investments to make sure that they’re keeping up with all the cost of living adjustments that may be happening in the world today.
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*See reference 1 and reference 2 for more information about the above-mentioned statistic.
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