Keeping your retirement income on pace with future inflation can be a significant piece to your overall financial future. Without a strategy in place, you may find your purchasing power diminishing over time – and in some cases, it could be necessary to make tough decisions regarding what, and what not, to purchase.

Forgoing a trip to Europe might be difficult – especially if it has been a long-term dream. But having to determine whether to spend your recourses on food OR healthcare – but not both – can be even more difficult. That’s why it is essential to know that your retirement income will rise over time.

What Inflation Looks Like

Inflation is defined as the “decline in purchasing power over a period of time.” This relates to the increase of an average price level of goods and services, and in turn, it means that a unit of currency will effectively buy less than it did in the past.

Typically, these rising prices occur gradually, so it can be difficult to notice just how much inflation is impacting your spending power on a year to year basis. But when it is tracked over a longer time period, it becomes easier to see just how much of an impact it makes.

Looking at it another way, if your income does not go up, you will be able to purchase less over a period of time. As an example, if you had 9 cents to spend:

• In 1916, it would purchase a quart of milk
• In 1966, it would purchase just one small glass of milk
• In 2017, it would only be able to purchase 7 tablespoons of milk

Many people do not consider the effect that inflation can have on their retirement income. But regardless of whether you’re working or retired, the price of goods and services that you need and want will still typically continue to rise. Therefore, your income needs to rise, too!

It is important to keep in mind that, just like the stock market, “averages” are just exactly that – averages. This means that year over year, inflation could be significantly higher (or lower), so this needs to also be considered. (Notice in the chart below the difference between just 2020 average prices as compared to average prices in mid-2022).

Average Prices in 2000 versus 2022

Sources: https://thepeoplehistory.com/2000.html / United States Bureau of Labor Statistics

Keeping Your Income Where You Need It to Be

Regardless of how much money you have saved, a secure retirement has more to do with the generation of income that lasts as long as you need it to. One way to do this is through an annuity.

Annuities can pay out income for either a pre-set time frame, such as 10 or 20 years, or for the remainder of your lifetime, no matter how long that is. These financial vehicles can also be designed to increase the amount of income that you receive over time. For instance, cost of living riders adjust the dollar amount of cash flow that is paid out by an annuity each year.

There are also inflation-protected annuities available in the marketplace. These annuities have their payments indexed to the rate of inflation in the economy. It is important to note that these annuities may have an upper limit, or “cap” on the amount of increase they provide on an annual basis.

Other options for increasing income in retirement could include:

• Increasing the amount or percentage of portfolio drawdown(s)
• Social Security cost of living adjustments

Will You Have a Secure – and Rising – Income in the Future?

Because creating an income plan that not only includes a lifetime stream of cash flow, but also one that rises over time, can require many “moving parts,” it is recommended that you discuss your situation and objectives with a retirement income specialist.