Make no mistake: Inflation is an enemy of your retirement savings. Over time, even relatively low inflation will erode the purchasing power of your savings. However, there are ways to combat inflation’s effects.
Understanding Your Opponent
Inflation increases the amount of money you will need just to maintain your preretirement standard of living. Even if you expect to cut back on spending after you retire, inflation could continually increase the amount of income you’ll need each year. If your investments do not keep ahead of inflation, you may not have enough money for a comfortable retirement.
Planning for Battle
Since the average life span continues to increase, it’s wise to plan for a retirement that may last 20 years or longer. Be sure to factor in any extra expenses you anticipate having. Medical expenses may consume more of your income. And if you want to travel, you need to plan for those expenses, too.
Keep in mind that some expenses may increase faster than the inflation rate. For example, health-care costs have been increasing at record rates. Since many employers no longer provide retirees with health insurance, this could be an important factor in your planning.
One way to offset the effects of inflation is to increase the amount you’re saving for retirement. Contributing more to your retirement plan each year will help your account keep pace with inflation. A good time to increase your contribution is when you receive a pay raise.
Another strategy you can use to protect your retirement account from inflation is to become a more aggressive investor. Consider increasing the amount of money you have invested in assets, such as stocks, that have the potential to grow faster than the inflation rate. Increasing the amount you save each year and investing more aggressively could help you win the battle against inflation.
The content of this material is for informational purposes only and intends solely to serve as a guide and/or an additional tool in helping you plan for retirement. An investment in a retirement plan is not a bank deposit or a savings account; is not an obligation of, nor guaranteed by Banco Popular de Puerto Rico or its subsidiaries and/or affiliates; is not insured by the FDIC or any other government agency; and may lose all or part of its value. Banco Popular de Puerto Rico and/or its subsidiaries and affiliates are not engaged in rendering legal, accounting or tax advice. If legal, accounting, or tax assistance is required, the services of a competent professional should be sought. Consult your accountant, attorney or tax advisor before investing.