Steve Kerby

The cumulative effects of inflation are often ignored by seniors planning retirement. This oversight can wreak havoc when you no longer have a paycheck.

I was asked a question from a member of our Wallowa community regarding the difference between net income and NET NET income when business planning.

As an example, if you buy an article to sell in your retail shop for $5 and sell it for $10, the difference between cost and sales is your net profit. But this is not an accurate picture of the success of your business. To calculate the exact NET NET profit, you must also consider the costs of running the business, taxes, overhead, rent, labor, payroll taxes, any pension liabilities, health insurance benefits costs, any interest on loans, and all other business expenses. When that number is known, then simple math will determine your NET NET return. A true and final result, after more than the obvious subtractions and allowances.

If you’re like many people, the older you get, the more you think about effectively planning your retirement. There is no way to be 100% certain how long a person will live after they retire or exactly how much money they will need, so you must be aware of some basic principles.

One of these — the certainty of inflation — is often overlooked by preretirees. It’s only several years into retirement that seniors sense their money simply isn’t going as far as they once did and that they may have underestimated how much they needed to create their dream retirement.

Many retirement planners preach a strict gospel of “avoid risk at all costs.” But, is this truly the advice for those within 5-10 years of retirement?

What about the impact inflation has, not only on your daily purchases and costs of goods and services but on your retirement savings? Actuarial tables indicate that someone retiring right now at age 65 might live another 20 years or more. Using a modest 3% rate of inflation, your cost of living could double in under 25 years.

If your financial adviser seems too intent on protecting your wealth and has no strategy in mind for achieving growth that offsets or outpaces inflation, you may need to get a second opinion.

Here are a few issues you should discuss with your advisor as you enter your financial life’s distribution phase.

Cost-of-living adjustments (COLA) for Social Security won’t keep pace with inflation. A major source of retirement funding for seniors is Social Security.

While Social Security, unlike other investments, does provide periodic cost of living increases, these have never managed to offset inflation. Many financial experts believe that the Social Security Administration uses benchmarks that underestimate the actual rate of inflation. For example, from 2000-18, the cost of drugs commonly prescribed for seniors rose 188%. This dramatic spike caused the purchasing power of Social Security to fall by 34%. The lesson here is that, while Social Security is an essential piece of your retirement plan, you cannot expect payouts to keep up with inflation.

Investments and savings erode with inflation. Like water, inflation has a slow but dramatic ability to erode nearly everything it touches.

While the immediate consequences of inflation seem minor, over time, the effects compound, impacting every aspect of your post-work life. To loosen inflation’s grip on your finances, consider investing in things other than bonds and CDs, whose rates of return can be much, much lower than a conservative 2% inflation rate.

Inflation risk is real, and seniors must account for it when designing their retirement blueprints. Retirees and those about to retire must actively manage their finances and understand the ramifications of inflation.

Nominal gains will probably not be enough to offset inflation risk. However, you do have a say in where your wealth gets invested. Educating yourself on inflation risk and other factors that threaten your nest egg is the first step to avoid making mistakes with your money from which you will have no time to recover.