Imagine it. It’s 2011, you’re 40 years old, and you decide to start saving and investing for retirement in earnest. Your goal? To retire in 2036 at age 65 with a $1 million nest egg. That clearly sounds like a lot, but will it be enough? Much depends on a certain retirement number that many people ignore.
That number is the inflation rate. Over many decades, inflation has been roughly 3%, but that’s an average. There are some years or periods of years with quite steep inflation — even in double digits — and some featuring low inflation.
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Simply put, inflation eats away at the purchasing power of your money and over longer periods, it can do a lot of damage. Imagine that you reach your goal of amassing $1 million by retirement in 2036. Well, if inflation averages 3%, the $1 million that you expected would be enough back in 2011 will have the purchasing power of only around $500,000 after 25 years.
So your goal will have been too low. Things that cost you, say, $1,000 in 2011 may cost you $2,000 in 2036. Inflation is an issue in retirement, too. Because even if you retire with what you think is enough — such as $2 million — it too will have less purchasing power in your later years of retirement.
Fortunately, inflation won’t doom you if you’re prepared for it. Here are some strategies to consider:
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Beefing up your retirement nest egg goal — perhaps even doubling it, if you can.
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Consider delaying retiring for a few more years, as that lets your nest egg grow for longer and leaves it having to support you for fewer years.
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Consider delaying claiming your Social Security benefits, too, ideally until age 70. (Various studies have found that for most people, delaying until 70 will get you the most in total benefits.) By maximizing your benefits, you’ll also be getting more out of the nearly annual cost-of-living adjustments (COLAs).
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Consider loading your portfolio with lots of healthy and growing dividend-paying stocks — because those dividends tend to be paid in good times and bad, and they will also likely increase over time, often keeping up with or surpassing inflation. (You don’t have to become a dividend stock expert, either — you might simply invest in one or more dividend-focused exchange-traded funds (ETFs).
