We all know that inflation will affect our long-term financial plans, particularly with regard to retirement budgets. No, you usually won’t notice much change in prices from one year to the next, but over a 20-year retirement inflation could gradually double the prices of things like housing, food, medical care, gas, and services.
That’s why we watch the Consumer Price Index (CPI), and its reports of annual inflation. For example, inflation was measured at a relatively modest 2.1 percent in 2016. But it’s important to keep in mind that the CPI calculates the average inflation rate by measuring the prices of 2,000 different goods and services. Therefore, average inflation rates might not mean as much to you, as the prices of things you actually use on a regular basis.
To illustrate what we mean, take a look at the average price changes in the following categories:
- The price of airfare decreased by 4.7 percent
- The cost of groceries decreased by 2 percent
- The average used vehicle declined in value by 3.5 percent
- The cost of communications dropped by 2.6 percent
- The cost of education increased by 2.7 percent
- The price of gas increased by 9.1 percent
- The cost of healthcare increased by 4.1 percent
- The price of housing increased by 3.6 percent
As you can see, the overall rate of inflation might differ quite a bit from the price changes in individual categories. So, inflation might impact you more or less than the average person, depending upon how you tend to spend your budget.
For example, once you’re retired, you might spend a lot more on healthcare. When prices of healthcare jump dramatically, your budget will be more affected. If you’re helping adult children with college expenses, tuition increases will affect you more. On the other hand, you’re no longer commuting to work, so hopefully your gas expenditures will decrease.
The point is, remember not to think of inflation as an overall change in prices over time, but look closely at your own budget and how individual categories might affect your budget throughout retirement. Call us to discuss your retirement income plan, and we can help you identify ways to manage the expenses that will impact you the most.
Source: US Bureau of Labor Statistics, 2017