The prospect of running out of money in retirement is a scary one to say the least. According to the Transamerica Center for Retirement Studies, 42% of retirees say their top financial concern is covering day-to-day expenses.
If you’re still working on building up your retirement savings, you have to be on the lookout for anything that could derail your plans. One of the sneakiest retirement killers also happens to be the one people tend to think about the least: inflation.
How inflation eats away at your retirement income
Inflation is something that affects all Americans. When inflation is low, people are encouraged to spend more because their dollars go further. Prices don’t grow as quickly and when interest rates are also low, borrowing money looks a lot more tempting.
So what does that have to do with your retirement? The fact is, inflation is fluid. It can and does change over time. While inflation is low at the moment, hovering around 1%, it’s averaged around 3% historically. When inflation is high and prices are on the upswing, that can take a big bite out of your spending power in retirement.
When you retire, certain expenses are likely to go up while others might go down. Unless you happened to be blessed with perfect health, medical care is something you’re likely going to spend more on as you get older. The Bureau of Labor Statistics estimates that 55- to 64-year-olds spend an average of 8.8% of their household income on healthcare each year. By the time they reach age 75, the average healthcare spending creeps up to 15.6%.