SHOW NOTES: 2019-05-02 MiM

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Last Week’s Question of the Week: If you are under 50 years old, how much can you save into your 401k or 403b retirement plans in 2019? Is it $10,000 or $19,000?

ANSWER: If you are under 50 years old, you can contribute $19,000 in 2019.

HOST: When we are saving money for retirement, how concerned do we need to be about planning for inflation?

KLAAS FINANCIAL: Yes, accounting for inflation for our retirees who may be retired for 20-30 years can be very important, since we continue to see life expectancies in the U.S. still very high. So, as an upcoming retiree, you don’t need to be worried about inflation but you should understand its potential impact.

In its most basic sense, inflation is defined the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Due to inflation, the purchasing power of the dollar will fall. Many people do not actually understand the concept of inflation risk. Putting money under your mattress or in your savings account does nothing to help you with future purchasing power. Based on U.S. historical inflation rates over the past century, there were some years where inflation was under 1% or even negative. Other years, however, have seen inflation rates as high as 20%.

Putting Inflation Into Dollar Figures — According to, the average annual rate of inflation between 1913 and 2013 was 3.22%. Given that figure, in just one year’s time, the price increases of the items you purchase may not create a financial impact for you. For instance, if the rate of inflation is 3%, then a loaf of bread that costs $1 in a given year will cost $1.03 the following year.

Using this average inflation rate of 3.22%, your income would have to double roughly every 22 years in order to keep pace with purchasing the same goods and services that you buy today. Put another way, if you retire today with a monthly income of $5,000, in just over 20 years, your retirement income would have to double to $10,000 per month in order for you to live the same lifestyle.

While just a few cents per year may not appear to be troublesome, over time, rising prices can add up. Over a retirement that lasts for 20 to 30 years, it can end up being a substantial amount of money.

HOST: what can we do to plan for inflation now to protect how it will affect our future retirement income? What investments are likely to keep up with inflation?

KLAAS FINANCIAL: Be aware. Understand that your income level also determines the effect inflation has. Higher income retirees (75k annual incomes and greater) have room in their budget to absorb price increases on essentials – inflation doesn’t have a huge negative impact on this group. For lower income retirees increases in basics like food, energy, and medical takes a bigger bite out of their budget.

Assume expenses will go up by 3% each year, in line with historical inflation rates.

Eliminate debt sooner than later. Higher inflation usually means higher interest rates. If you are borrowing from a bank the interest rate is likely to be above the inflation rate.

Make sure your Social Security Benefit is as high as possible. Social Security has automatic cost-of-living adjustments built in. It is a unique life-long inflation-adjusted source of income and smart planning can help you get more out of it. One-third of retirees will rely on Social Security to provide 90% of their retirement income. More than half will rely on Social Security for more than 50% of their retirement income. In 2019 we did have a COLA increase that brought up the benefit by 2.8%. However, part or even all of your annual increase in Social Security payments might be redirected to pay for higher Medicare premiums.

If you are going to be starting a Pension make sure you understand it. Many pensions are not adjusted for inflation, but some are. If you have a pension, find out if your payment will increase with inflation and modify your other investments accordingly.

Choose investments that rise with inflation. Some investments and insurance products are more likely to keep pace with inflation than others. The trade-off may be less income now, but more income later. This can include owning fairly safe investments such as TIPS (Treasury Inflation Protected Securities), or medium risk investments such as Inflation Protected Bond Funds or Floating Rate Funds. Also, be careful around annuities that can make inflationary promises but have a longer penalty period associated with them.

  • Diversified stock/mutual fund/bond portfolio: Most people become more risk averse as they get older. You don’t want to gamble away your nest egg in the years leading up to retirement. But the price of stocks generally keeps up with inflation. So to protect yourself, keep at least some portion of your retirement funds in stocks or stock mutual fund.

    Bonds are relatively safe investments that certainly belong in any retirement investment portfolio. But most bonds lose value if inflation increases. However, there are some bonds, such as Treasury inflation-protected securities, that are guaranteed to keep up with inflation.

  • Real estate. Since real estate tends to rise along with inflation, owning your own home is a hedge against inflation. Rental property is another investment that typically pays off during inflationary periods, since you have the ability to raise rents. But remember, if you’re a landlord, you’re not truly retired. Managing real estate takes time and attention, and not everyone finds it to be worth the hassle.
  • Precious Metals, Gold. Commodity stocks, such as gold and oil, tend to outperform during inflationary times. What about gold? Despite the common belief that holding gold is a good way to hedge against inflation, in the past gold has been a better crisis hedge than inflation hedge. That means during times of slow steady inflation, gold hasn’t kept up, but it soars during times of crises.

HOST: Any other tips to combat potential inflation?

KLAAS FINANCIAL: The biggest thing is to permanently downsize your expenses. If you downsize your house and move to a community with lower taxes and a lower cost of living, you save money throughout retirement. While the costs for taxes and home maintenance may still increase over time, the inflation will grow from a smaller base price.

Other ideas are:

  • Cut other expenses as you go along. You might need two cars to support your current lifestyle, but retirees might do fine with just one car.
  • Stock Up – If you are worried that prices will rise quickly, stock up on durable goods now.

  • Go Green – Make your home as energy-efficient as possible, reducing your exposure to rising energy prices.
  • Grow a Garden – Grow your own food.
  • Consider working a part-time job!
  • Walk, Bike, Ride – Live in a community where you can walk, bike, or take public transportation for your daily needs. This reduces your dependence on potentially rising insurance, gas, and maintenance costs.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.