History and Inflation - How it Could Affect Retirement

How to Stay Ahead of Inflation in Your Retirement Savings

July 3, 2018 By Tom Limoges • Trust Investment Officer

 

On June 30, 1953, one of America’s most iconic brands rolled off the assembly line in Flint, Michigan.  The car, code named “Opel”, was designed to compete with the great European brands of the time and was named after a small class of escort vessels utilized during World War II.  Any guesses on the name of this famous American Muscle Car?  If you guessed the Ford Edsel, you would be wrong. However, if you guessed the Corvette, you probably know your sports cars – and are at least 65 years old… 

The initial price tag of the “Vette” back in 1953 was $3,490, the price of this famous car in 2018 starts at $55,000 – 15 times the cost in 1953. From the gas to fill that sports car (20 cents per gallon) to bread (14 cents per loaf), prices during the 1950s were much lower than they are today.  Inflation is an important, but often overlooked factor to consider when planning for your retirement. 

What is the Normal Inflation Rate?

Inflation has historically represented year-to-year price increase in goods, and generally sits between 2 and 4 percent. This rise, while small, makes a big difference when compounded over a longer period of time.  For instance, a gallon of gas today is around $3.00 and if prices rise at 4%, that same gallon will cost $3.12 next year – no big deal, right?  Similar to interest, when inflation is compounded over a period of time, the effects become much more evident.  

THE IMPACT OF INFLATION, IN TERMS OF GAS PRICES

Price of Gas

How To Plan for Inflation in Retirement

Two ways to make sure inflation doesn’t act like a speed bump for your retirement savings are to 1) Select the appropriate portfolio allocation and 2) ensure you are saving enough.  Over time, certain asset classes do a better job than others in staying ahead of inflation. It is an important aspect of the retirement planning process to consider your time horizon and select a diversified mix of stocks, bonds and cash. The most important factor to consider is how much you are actually saving.  Imagine you own the 460 horsepower 2018 Corvette Stingray.  If you forget to put in gas, your car won't move forward; the same can be said for your retirement savings.  

The impact of inflation is often viewed as a decline in purchasing power of your dollar over time and should not be left in the rear view mirror when planning for retirement.  Security National Bank offers a free retirement calculator that can estimate what your retirement expenses could be, based on an inflation adjusted percentage of your income.  We can also create a customized, goal-based financial plan to help you avoid sticker shock in retirement.

About the Author

Tom Limoges

Tom Limoges is an Assistant Vice President in Investments, developing investment strategies for Security National Bank's Wealth Management Division. He holds an M.B.A. from Wayne State (Neb.) College, and has been a member of the SNB Wealth Management team since 2002.