This is a guest post from Stacy B Miller, who’s going to give you some important information about retirees and Inflation in 2020.
Usually, retirees are not bothered about inflation. It’s not something that they think or discusses proactively with anyone. But little do they realize is that inflation affects their finances big time.
How Does Inflation Affect Retirees Financially?
Inflation not only increases the price of consumer goods but also decreases the purchasing power of the retirees. The following example can help you understand this fact clearly.
Suppose, you have arrived at a fast food joint with your grandkids for an evening snack. After finishing the snack, you ask the waiter to give you the bill. Once the bill arrives, you find that something is wrong. The restaurant has charged you almost double the price.
Quickly, you call the waiter and ask him to make the necessary correction. To your utter shock, the waiter tells you that the bill amount is correct. This is the new price of burgers and hot dogs.
What does this mean? Previously, you could buy 3 burgers at $6. Now, you have to pay $12 for the same thing. So you’re paying more than what you used to do. Previously, you could get 6 burgers at $12. Now, you can get only 3 burgers. Therefore, your purchasing power has decreased due to inflation.
As a retiree who is living on a fixed income and budget, this sudden increase in the price of consumer goods hurts you financially.
According to a study by the LIMRA Secure Retirement Institute, a 1% inflation rate could eat up almost $34, 406 of retirees’ financial benefits. If the inflation rate goes up by 3%, then it could eat up almost $117,000.
Does this mean that retirees will enjoy financially when the inflation is low?
Not necessarily. There are 3 valid reasons why retirees tend to suffer financially even when there is low inflation, and they are explained below in detail.
First: The Cost Of Healthcare Is Increasing Even When There Is Low Inflation
Unfortunately, the biggest problem for retirees is that they’re likely to spend dollars on something that has become the biggest concern of the government.
Healthcare has become extremely expensive and the cost is increasing day by day. In 2014, the inflation rate was only 1.6% but the healthcare cost went up by 5.4%.
So the seniors were deeply affected due to this. As per the reports of the Centres for Medicare and Medicaid Services, senior people spend 3 times more than working adults and 5 times more than children on healthcare. On average, elderly people spend $18,424 on healthcare annually.
Second: Retirees Tend To Spend More In The First 2 Years After Retirement
Healthcare is a genuine expense. Retirees can’t ignore it. But what about the other expenses? Travelling and housing expenses eat up a significant amount of retirees’ expenses due to lifestyle inflation.
In our country, it’s an undeniable fact that many retirees are still bearing the expenses of adult children. So that expense is always there, irrespective of inflation.
Other than that, 45.9% of retirees tend to spend almost 120% of their pre-retirement income in the first 2 years post-retirement. This indicates that some retirees may be going through lifestyle inflation.
Third: There Is No Adjustment In The Social Security Benefits
Seniors often find it very tough to deal with low inflation when the Social Security Administration doesn’t give an annual cost of living increase to the recipients.
For instance, in 2016, there was no annual cost of living increase since the Consumer Price Index (used to compute the inflation rate) remained static from July 2014 to September 2015.
How Can Retirees Deal With Onslaughts Of Inflation?
Indeed, retirees can’t control the inflation rate. It’s not in their hands. But they can use a few tricks to reduce their effect on their savings.
Some of them are given below:
1. Paying Off Debts
Retirees have limited money. When they are in debt, they have to pay a substantial amount on the interest rate. That hurts their savings even more. So a smart trick is to get advice on debt-free life, and then act accordingly.
There are plenty of ways to pay off debts. Debt snowball, debt avalanche, debt settlement, debt consolidation, and debt management can help them repay bills and save money simultaneously.
Once retirees are debt-free, they can save the interest that they had to pay earlier. They can invest money in something whose value would increase with the inflation rate.
Post-retirement, it’s best to not get into risky investments since retirees don’t have an additional source of income. They should rather opt for the conservative options since that would give stable returns.
2. Reducing Housing Expenses
House maintenance expenses and mortgage payments eat up a big chunk of savings.
An effective trick to reduce housing expenses is to move into a smaller apartment. This helps to reduce overall housing expenses (this includes property tax and homeowners insurance) and mortgage expenses.
Inflation can eat up the retirement savings of the seniors and push them towards deep financial trouble. The onus is on the retirees to think about a plan and combat it wisely.
Lowering expenses, eliminating unnecessary expenses, creating a realistic budget, and making smart investments can help to combat inflation deftly.
Please let me know your thoughts and comments below.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.