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The Boomer

Inflation and your retirement: Realities vs. myths

By Casey Dowd The Boomer FOXBusiness

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While Americans say their main economic concern is inflation, many are not properly prepared to address the potential risk it could have on their retirement plans, according to a new study.

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Data collected by the Allianz Life Insurance Company of North America showed many plan to address their concerns regarding inflation by being “more frugal.”

“Although it may be an option for managing expenses, frugality is not a financial strategy that will mindfully and effectively address the rising cost of living throughout retirement, especially one that could last 30 years or more,” Allianz Life Vice President of Consumer Insights Deb Repya said. “There are many factors to consider when planning a long, comfortable retirement and addressing inflation is a critical piece of that puzzle.”

A closer look at the realities of inflation can help separate myth from fact and provide people with an accurate look on how inflation can truly affect their financial future.

Repya broke down for FOX Business inflation and your retirement: myths vs facts.

Myth #1 – Inflation will rise more than 4% per year in retirement.

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Reality – According to the study on consumers’ perceptions about inflation from Allianz Life, the majority of respondents predicted an average cost of living increase of 4.4% per year. Even more extreme, 31% of respondents thought the cost of living would rise between 5-10% per year and nearly one in 10 (8%) reported costs would increase more than 10% each year.

The truth is the average inflation rate in the United States for the last 20 years was only 2.15%. So does the fact that most people overestimate the inflation rate mean they don’t really have to worry about how it can affect their retirement savings? Absolutely not, since costs will nearly double over 30 years – a reasonable time to spend in retirement – if the current rate of inflation remains constant.

While the study illustrates an understanding that inflation is an important retirement planning issue, it also shows there are still misconceptions about inflation and how to address it as part of a sound, long-term financial strategy. It’s critical for Americans to find specific solutions that help pay for health care and other long-term expenses on top of day-to-day essentials, especially since they will generally no longer have the opportunity to keep up with rising costs via regular wage increases.

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Myth #2 – Most Americans have a plan for dealing with rising costs in retirement

Reality – Despite inflation ranking as their main economic worry, the Allianz Life study found that 64% of respondents do not have a financial plan that addresses the rising cost of living in retirement. Of those who do, 51% claimed their financial “plan” to address it was to “be more frugal with money” when they retire.

Many Americans admit they will need to live more modestly in retirement and expressed concern about paying for essentials, particularly health care, as costs rise. Fifty-four percent of those surveyed claimed they were either “terrified” or “very concerned” that the rising cost of living would affect their ability to pay for healthcare. The same concerns were expressed about long-term care (45%), housing (33%), groceries/food (29%), and travel/leisure (27%). Nearly four out of 10 respondents expressed they were either “panicked” or “very worried” they might not be able to afford the lifestyle they want in retirement due to the increased cost of living

Although it may be an option for managing expenses, frugality is not a financial strategy that will mindfully and effectively address the rising cost of living throughout retirement, especially one that could last 30 years or more.

Myth #3 – Saving more now is the only way to deal with inflation while in retirement

Reality – Of course, it is always possible to try and save more while preparing for life after work, but that still may not be adequate if costs rise more quickly than anticipated. Thankfully, there is solid recognition that solutions exist that can help people with rising costs in retirement.

The vast majority (86%) of respondents in the study said they were interested in a financial product that offers guaranteed income for life plus the opportunity for income to increase over time. Even more specific, nearly three-quarters (73%) of respondents prefer the idea of a financial product that starts with a slightly lower income rate, but offers the possibility for income increases over time compared to one that has a higher, but fixed, rate.

Given the fact that different options do exist to help address rising costs in retirement, it’s a good idea to have a conversation with a financial professional about what solutions might work best for your specific financial situation. Bottom line, Americans need to be proactive in building a retirement strategy that will help manage the effects of inflation.

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