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How inflation affects your retirement in Florida

I want you to imagine a scenario. You have a $2,000,000 nest egg in the bank at 65 years old. You head into retirement and begin a fixed 4% withdrawal strategy, meaning you pull out only $80,000 a year, which is enough for a 25-year retirement. But you haven’t factored in how inflation affects your retirement.

Inflation affects your purchasing power

Life is going pretty well – the years pass, you’re having a great retirement, and you’re staying healthy and sprite. But for some reason, the numbers aren’t adding up anymore. You can’t buy the same amount of groceries anymore. It costs more to fill up the car. In fact, everything you purchase costs a bit more every year. But on a year-by-year basis, you hardly notice it. It creeps up on you until you realize that you’re essentially broke. Yes, maybe you have a good amount of money left in your account, just as you planned, but it’s not enough.
After 20 years, you have $400,000 in your account, but that $400,000 is worth only $221,470 – your dollar is worth about half what it used to be. So, if $100 for groceries was enough 20 years ago, now it’s buying a little more than half of what it once did.
So how can you maintain your lifestyle without risking your savings by staying invested in the market?
Well, you could adjust your withdrawal rate for inflation. Let’s see how that works out:
End of Year 1
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End of Year 8
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End of Year 10
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End of Year 12
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End of Year 19
End of Year 20
Unfortunately, in year 19, you’ve already run out of money. You’ll have to live on Social Security for the rest of your life. Hopefully, you waited until you maxed out your potential benefit. In any case, you must maintain a reduced lifestyle for the rest of your life.

Inflation gets much worse with a longer lifespan

A 25-year retirement sounds outstanding. However, an increased lifespan will only lead to a longer retirement. Again, great, right? But it’s already tough to plan for a 25-year retirement. How about a 40-year retirement? Many people are living to be over 100 these days, and with enormous advances in technology, the chances of living that long are only going to go up.
Using the same figures from above, if our theoretical hero planned for a 25-year retirement and then lived to 105, their original nest egg would be about -$4,000,000. So, by working backward from a best-case scenario of a long life, we conclude that a $2,000,000 nest egg isn’t nearly enough. And, of course, the earlier you retire and the longer you live, the more significant an impact inflation will have on your savings.

How to fix it on the eve of retirement

If you find yourself in this conundrum, there are three simple ways to repair it, all with their downsides and risks.

Drastically reduce your lifestyle early on.

This isn’t easy to do when you finally get to relax and enjoy the fruits of your labor. You also don’t know what fate has in store for you. If you do pass away earlier than expected, what will have been the point of living like a miser the last few years?

Stay invested in the market

Now, this comes with its own unique risks that could potentially be more harmful than inflation. For example, a series of down years may leave you with a significantly reduced nest egg that may never catch up to its previous value, especially if you’re pulling from it each year. You could go for a blended approach, such as pulling more when the stock market is doing great and pulling less when the stock market is down, but that’s no guarantee. Alternatively, you can move a large portion of your assets to more stable bonds – but there is always a risk in investing.

Continue working

If you’re in good health on the eve of your retirement, show no signs of slowing down, and have doubts that your nest egg will be enough for an extended retirement, you may want to continue working. Nobody is saying you can’t switch careers – maybe you can retire from your primary job and take on a new, exciting job that you never had the chance to explore. In fact, delaying full retirement may be beneficial for your mental health, as sometimes retirement leaves people without a strong sense of purpose, especially if they move away from their traditional support structures, such as family, friends, and colleagues.

How to prepare for inflation beforehand

The above scenarios and fixes assume a lack of foresight before retiring. It’s strange because many Americans get all worked up when inflation becomes rampant, but they still fail to account for it in the long run, where it hurts the most.
So, the earlier you start preparing for an inflation-shocked retirement, the better.

Start saving young

The best way to prepare for a battle with inflation is to start saving young and often. The more years you let compound gains work for you, the higher the chances are that you will have a large enough nest egg with enough momentum to get you through retirement. What’s so great about it is that even in bear markets, your portfolio can continue to grow because of the sheer amount of dividends or interest payments it receives.

Address taxes early on

One major factor we left out of the equation was taxes. Besides getting battered by inflation, a large part of your retirement income may go to the taxman before it reaches your pockets. This is where Roth and other post-tax retirement accounts come in handy, as you pay taxes as you put into them and then let those funds grow tax-free. As long as you follow the rules and regulations, your withdrawals on your market gains will be tax-free AND won’t be counted as taxable income.

Prepare for long-term care

If you’re a baby boomer, there’s, unfortunately, a high chance that you will need an extended stint in the hospital or nursing home. Typically, medical costs outpace inflation, so you want to ensure those costs are covered. One strategy is to roll over funds from an IRA into an insurance policy known as Asset-Based Long-Term Care Insurance.

Look into Annuities

Annuities, while not for everyone, can work as a failsafe in case you do run out of money and Social Security isn’t enough to cover your expenses. An annuity is essentially an agreement between you and an insurance company, which stipulates that the insurer will repay the initial investment along with interest via installments at a future date, potentially for the rest of your life. There are also COLA-adjusted annuities, which would give you protection against inflation.

Inflation doesn’t have to ruin your retirement

If you’d like to get ahead of the game and explore inflation-fighting assets and strategies, we’d be happy to create a solid financial plan. If you’re nearing retirement and are worried about inflation’s corrosive effects on your portfolio, we can figure out strategies to help you weather the storm. Just click the button below!

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

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  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

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