Let’s unravel the intricate relationship between inflation and retirement planning. Inflation, the subtle yet relentless force driving up the cost of living, can wield a profound influence on your retirement nest egg. As you envision your golden years, it’s crucial to comprehend how inflation can erode the purchasing power of your savings over time. Failing to account for inflation can result in a stark gap between your retirement needs and available funds. Below you will find two key strategies that can help fortify your retirement plan against the corrosive effects of inflation. From diversified investment portfolios to inflation-adjusted retirement planning tools, join us as we navigate the terrain of safeguarding your retirement dreams in the face of inflationary challenges.

Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. And those who put off saving and investing are impacted even more.

The effects of inflation can’t be denied — yet there are ways to fight them. Diversifying your portfolio with at least some investments whose potential return exceeds the inflation rate is a good rule of thumb. For example, a portfolio that earns 2% when inflation is 3% actually loses purchasing power each year. Though past performance is no guarantee of future results, stocks historically have provided higher long-term total returns than cash alternatives or bonds. However, that potential for greater returns comes with greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to balance your financial and emotional risk ability to ride out those ups and downs as you try for greater returns.

Check out our previous blog to understand inflation’s effect on bond yield prices.

Another way to help manage inflation risk is to consider various riders that are available to some Long Term Care plans.  When you buy a long-term care insurance policy, you choose a daily benefit level (the amount that the policy will pay for your daily care if you need it), but it’s hard to know today what the future cost of care will be. Although the national average daily cost of a semi-private room in a nursing home is approximately $205, the cost may be much higher in your area, and may rise substantially in the future.*

An inflation rider automatically increases your benefit amount by a specific percentage each year, by either simple interest or compound interest. Cost-of-living inflation protection, usually pegged to the Consumer Price Index, is also available.

Inflation Chart

Five percent is a typical inflation factor. The chart above shows the effect of several different types of inflation riders:

No Inflation Option

The straight blue line illustrates the daily benefit of a policy with a 5 percent compound inflation rider, which in later years will provide a significantly higher daily benefit than the percent simple option.

5 Percent Simple

The green line shows the effect of 5 percent simple interest inflation protection. With this option, the daily benefit amount increases 5 percent per year.

5 Percent Compound

The yellow line illustrates the daily benefit of a policy with a 5 percent compound inflation rider, which in later years will provide a significantly higher daily benefit than the percent simple option.

Cost of Living

Finally, the red line shows the effect of a cost-of-living rider. For this illustration, it is assumed that the daily benefit amount increases at an annual rate of 3 percent for the first 10 years and 4 percent during years 11 through 20.

As a reminder, all investing involves risk, including the potential loss of principal, and there is no guarantee that any investment will be worth what you paid for it when you sell.

*The National Clearinghouse for Long-Term Care Information, 2011


Sources: Broadridge Investment Management Solutions

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