Atlanta Financial Newsroom

Protecting Your Retirement Income from a Silent Killer

Rick Henderson, CPA, CFP®, AIF®
November 15, 2017

In talking to my clients about planning for their retirement income and building portfolios for their retirement, I find that many of them are concerned about stock market volatility and protecting what they have built over the years. What I rarely hear them mention is the silent killer of retirement income purchasing power: inflation.

What can you do to prevent your retirement income’s purchasing power from this silent killer?

Inflation is the rise in the cost of goods and services every year. The Federal Reserve has a target inflation rate for our country, currently about 2%. A modest 3% inflation rate does not seem like much from year to year. But, with people living longer, the time spent in retirement is getting longer and after 20 years, a 3% inflation rate can reduce the purchasing power of $100,000 to $55,368. Looking at it in reverse, if there is 3% inflation for 20 years, it will take $180,611 to purchase the same goods and services in 20 years that $100,000 buys today.

Inflation, Consumer Prices for the United States

Inflation, Consumer Prices for the United States

Shaded areas indicate U.S. recessions. fred.stlouisfed.org

Inflation for 2016 was 2.11 As you can see from the “Inflation, Consumer Prices for the United States” chart, the annual inflation rate for any given year can vary greatly. Currently, we are in a low inflation environment, with the average annual inflation rate for this decade remaining below 2% thus far.  Historically the average inflation rate has been higher over longer periods of time.

Average Annual Inflation by Decade

Average Annual Inflation by Decade

InflationData.com ©2015

As you can see from the “Average Annual Inflation by Decade” chart, the average annual inflation in the United States since 1913 is more than 3%. If the inflation rate during your retirement exceeds the 3% mentioned above, inflation’s potential impact on your retirement will be even greater.

So, what are some ways that you can you protect the purchasing power of your retirement income from inflation? 

The first step is to understand the difference between nominal and real rates of return. The nominal rate of return on your portfolio is the amount it actually returns. The real rate of return is the effective amount your portfolio grew after adjusting for inflation, and is calculated by the following formula:

Real Rate of Return = ((1+Nominal Rate of return)/(1+Inflation Rate))-1

To keep things simple, you can approximate the real rate of return by taking your nominal rate of return minus the inflation rate2:

Approximate Real Rate of Return = Nominal Rate – Inflation Rate

The real rate of return of a portfolio is a better indicator of the growth of the purchasing power of your portfolio. Using the simple method above, if your portfolio earned 6.5% in a year, and the rate of inflation for that same year was 3%, your real rate of return on your portfolio would be about 3.5%, an increase to your purchasing power. But, if the nominal rate of return on your portfolio was 2% in this example, the real rate of return on your portfolio would be about -1.0%, and you would be losing purchasing power. Please see the chart below which illustrates the change in purchasing power of $100,000 over 30 years at 3% inflation using a nominal annual rate of return of 6.5% vs. 2%.

30 Year Purchasing Power Chart

Now with a better understanding of the staying power of your money over varied periods of inflation, you can consider three options for making it last longer:

  1. Delay taking social security until age 70 and get the benefit increases between age 62, Normal Retirement Age (NRA), and age 70, plus SSI benefits increase with inflation.If you start your benefits early, they will be reduced based on the number of months you receive benefits before you reach your NRA. If you were born from 1943 through 1954, and your NRA is age 66, the reduction of your benefits at age 62 is 25 percent; at age 63, it is about 20 percent; at age 64, it is about 13.3 percent; and at age 65, it is about 6.5 percent.If your NRA is older than 66 (that is, you were born after 1954), you can still start your retirement benefits at 62 but the reduction in your benefit amount will be greater, up to a maximum of 30 percent at age 62 for people born in 1960 and later.

    If you delay taking your benefits after your NRA, you are rewarded with an 8% increase per year that you wait. So, if an individual with an NRA of age 66 waits until age 70 to take their Social Security Benefit, they are rewarded with a 32% benefit increase over their normal benefit at NRA.

    See the table below for examples.

    Benefits Table

  2. Build a portfolio with a balance of equities vs. bonds based on your individual investment time horizon, risk tolerance, and desire for inflation protection. While stocks and stock-related investments are naturally more volatile than bonds or cash, they can be good as inflation fighters because over the long-term, companies can increase prices as their costs increase with inflation.
  3. On the bond side of your portfolio, incorporate instruments that have the ability to adjust with inflation. Floating rate notes offer interest rates that adjust and can rise as key interest rates rise.  The rates are reset periodically to reflect changes in key market interest rates. Inflation-linked bonds are usually issued by governments and have interest and principal payments that are adjusted periodically as inflation changes.

There is no easy one choice for any individual or family and sometimes the right choice may be a combination of options. But to make sure you make the best choice, be sure to discuss with your trusted Atlanta Financial advisor.


1Bls.gov. (2017). U.S. Bureau of Labor Statistics. [online] Available at: https://www.bls.gov/ [Accessed 8 Nov. 2017].

2Financeformulas.net. (2017). Financial Formulas and Calculators. [online] Available at: http://www.financeformulas.net [Accessed 8 Nov. 2017].

3SSa.gov. (2017). The United States Social Security Administration. [online] Available at: http://www.ssa.gov [Accessed 8 Nov. 2017].

Share This:

Share on facebook
Facebook
Share on linkedin
LinkedIn
Share on twitter
Twitter
Share on google
Google+

Cathy Miller Receives the Women’s Choice Award® as Highly Recommended Financial Advisor by Women for Women for Seventh Consecutive Year

Atlanta – November 19, 2019 – Atlanta Financial Associates, an independent financial advisory firm, recently announced that Cathy Miller, MBA, CFP® , CRPS®, CDFA™, has received the Women’s Choice Award® for Financial Advisors and Firms.

As the leading advocate for female consumers, WomenCertified Inc. selected Miller based on rigorous research and specific objective criteria; she has received this recognition every year since 2013. 

Read More »

9 Year-End Tax Tips

This year marks our second year living with the sweeping tax law changes passed at the end of 2017, known as the Tax Cuts and Jobs Act.  How did you fare under the new tax law, or do you know?

Many tax payers had pleasant surprises when they filed their 2018 returns, with smaller tax bills and/or larger refunds than usual.  But some tax payers felt like they didn’t benefit from the tax cuts at all.  As we met with clients in 2019, we found that for some of those clients the total tax paid was in fact higher, but due to higher income levels (from a strong economy and stock market), while tax rates actually did decline from pre-2018 levels. Unfortunately, for a significant minority of our clients, both rates and taxes paid were higher due to limitations on mortgage interest deductions, the elimination of personal exemptions and the cap on state and local tax deductions (the so called “SALT” deductions). 

Regardless of which camp you found yourself in after filing your 2018 taxes, there is still time to minimize what you will owe for 2019 with smart planning.  We have listed 9 tips to consider between now and year-end.

Read More »

Billfolds and Babies

A baby changes the game in so many ways. I think back to the first time I heard my little boy say “peeeez, Daddy.” I would have handed that little guy nearly anything he wanted with little remorse just because of how cute it was. It makes me think about how as parents, we naturally want to not just meet, but exceed the wants and needs of our children; however, accomplishing that can be quite a challenge. With so much time focused on getting ready mentally, spiritually, and physically for a new baby, it is also fact that soon-to-be parents can especially end up feeling a bit unprepared financially because it is so tough to judge how expensive life as a growing family will be.

Knowing personally and professionally that the fiscal changes associated with parenthood are a gracious plenty, I’ve laid out a few things below that will hopefully make the experience of welcoming a new baby less of a learn-on-the-fly education.

Read More »

4 Estate Planning Tips When You Have Young Children

1. Write a Will
For most young parents, writing a will is less about distributing assets and more about naming a guardian for their children. The guardian named in your Will is the person that would take care of your children if you and the other parent were unable to do so. This situation is very unlikely, but worth addressing just in case.

If your children ever needed a guardian, the local Probate Court would appoint the person designated in your Will, absent a serious problem with that person. You can name different guardians for different children if you wish. If you do not have a Will with a Guardianship Designation, or if you haven’t made your wishes in the Will clear, the Probate Court would have to select a guardian for your children without any guidance from you. The most common choice is a family member. But what if you really wouldn’t want a certain family member to raise your children? Or what if you preferred that a close friend step in as guardian? The Court would have no way of knowing your wishes.

Read More »

Yearly Archive

Author Archive