Inflation remains a threat for retirement, particularly for older Americans, who experience higher inflation rates than other consumers. The main reason is the substantial amount of their budget devoted to health care, according to LIMRA Secure Retirement Institute’s 2015 Retirement Income Reference Book.
Current figures from the Centers for Medicare and Medicaid Services (CMS) show health care spending per person for the 65 and older population averaged $18,424 in 2010, three times higher than spending per working-age person ($6,125) and five times higher than spending per child ($3,628). CMS notes that overall health care expenditures increased 5.3% in 2014, and while that’s greatly improved from the 1990s when double-digit increases were common, it’s still significantly higher than today’s inflation rates.
Across the board, inflation remains a top risk for retirees and pre-retirees, even with inflation at its current rate of just under 1% (year over year, Mar. 2016, Bureau of Labor Statistics). Even a low inflation rate can significantly weaken purchasing power in the long run. LIMRA Secure Retirement Institute modeled the effect that 2% annual inflation could have on a 20-year retirement. Using a fixed monthly income of $1,341 (the average monthly benefit paid by Social Security) and assuming that monthly expenses increase from $1,341 to $1,993 at the end of the 20-year period, the inflationary impact results in a shortfall of $73,376. When the calculation is run at 3% inflation, the shortfall jumps to more than $117,000.
Illustrations like this can help pre-retirees and retirees better understand the importance of retirement products that make adjustments for inflation, LIMRA says. Retirees and pre-retirees can work with a financial professional to examine the effect of inflation on their retirement and develop a plan to mitigate this risk and others.