"Get Your Finances Ready for Retirement"-Keeping Pace With Inflation During Retirement
Monday, August 25, 2008SUSIE GHARIB: Gas prices continue to ease, averaging $3.68 a gallon nationwide. They've dropped $0.43 from their mid-July high. Still, this year's run up in energy and food prices caught many by surprise including retirees. In tonight's installment of our series "Get Your Finances Ready for Retirement," Connie Hicks looks at why new retirees need a strategy to stay ahead of inflation.
CONNIE HICKS, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Elaine Nichols decided to quit working five years ago, the Buckeye, Arizona resident thought she was set. She had a pension and a 401k. Then Nichols met with financial planners Jared Roskelley and Robert Jackson.
ROBERT JACKSON, CFP, JACKSON FINANCIAL ADVISORS: One thing that we were concerned about is she had a pension from her employer and it did not have a cost of living escalator on it and that cost of living, the lack of having a cost of living or a COLA, was a real concern.
HICKS: That came as a surprise to Nichols. Inflation had been relatively low for years and she, like many other recent retirees, didn't consider it a big deal.
ELAINE NICHOLS, RETIREE: Cost of living, things like that, I have not considered.
HICKS: But the cost of living has taken off lately. While inflation is of concern to everyone, Kerry Hannon of "U.S. News & World Report" says it hits retirees especially hard, because it affects the things they use most.
KERRY HANNON, RETIREMENT CORRESPONDENT, U.S. NEWS & WORLD REPORT: And these are things like food, the rising cost of food, the rising cost of energy prices, your gasoline bills, even air fare, the cost of heating your home, these things are inflationary, affected by inflation and continue to rise.
HICKS: The consumer price index rose by an average of 2.7 percent during the past decade. That's better than the double-digit inflation of the late '70s and early '80s. But in a retirement that can last 20 years or more, even a modest inflation can have a significant impact. For example, if a tank of gas today costs $50, at a 2.7 percent annual inflation rate, that tank would cost more than $65 in 2018 and over $85 in 2028. Or, groceries. If you're spending $100 now, at the same rate of inflation, they would cost more than $130 in 2018 and over $170 in 2028. To help retirees plan for future price rises, wealth manager Brant Keller figures in a 4 percent inflation rate.
BRANT KELLER, FAC WEALTH MANAGEMENT: For an existing retiree, obviously if I need $50,000 $100,000 to live on today and I figure inflation at 4 percent, I know roughly in 15 years that it's going to be about $200,000 that'll buy the same groceries.
HICKS: Brant Keller says retirees' portfolios need to be diversified.
KELLER: That has to be calculated into the growth of the nest egg and that's what ultimately leads to the assumptions of how much a person should allocate towards the stock market versus the bond market versus real estate market.
HICKS: And for retirees who think stocks are too risky, Kerry Hannon notes there are government bonds that keep up with inflation.
HANNON: A nice area to look at are the Treasury-inflation-protected security or TIPS and they are adjusted upwards for inflation so they keep pace with the inflationary environment and you can buy them directly through the U.S. Treasury.
HICKS: The longer one lives, the more of a problem inflation poses. Nichols and her sister share care of their 96-year-old mother.
NICHOLS: It makes me wonder if my money will last as long as I last, with the longevity in my family.
HICKS: Already, Elaine's money doesn't go as far as it used to. Rising prices have made it more expensive for her to buy supplies for her craft projects, like these flower pots and cards. She now knows that if she is to maintain her standard of living over the long-term, she'll have to take steps to counter the effects of inflation. Connie Hicks, NIGHTLY BUSINESS REPORT, Scottsdale, Arizona.
