In 1960, the median value of a home in the United States was $11,900. Today, some 50 years later, you'd be hard-pressed to buy a decent car for that amount. And in 50 more years, you might find it impossible to buy a car for $170,000, which was the median sales price of a single-family home in the United States in 2010.
And that, my friends, is inflation -- one of the most insidious risks Americans will face in retirement. Yet despite years of witnessing firsthand the effects of inflation, many Americans are not taking into account the adverse effects it can have on their retirement plans. Or at least so says some recent research published by the Society of Actuaries.
Compared with other planning activities, only 72 percent of preretirees and 55 percent of retirees are calculating the effects of inflation on their retirement planning, according to the group's report, "The Process of Planning and Personal Risk Management." And this finding, the group said, highlights the need for individuals to better understand and manage inflation and longevity risks when planning for retirement.
When it comes to inflation risk, Christine S. Fahlund, certified financial planner, vice president and senior financial planner at T. Rowe Price Investment Services Inc., says every retiree should, for example, understand the basic fact that if annual inflation is 3 percent on average, in just 10 years a retiree will need to withdraw 30 percent more money from his nest egg to purchase the same goods and services that cost $10 today.
"And much more disturbing, in 20 years that retiree will need to withdraw 80 percent more to maintain today's lifestyle," she said.
So what are some of the best ways to take inflation into account when planning for retirement?
*Inflation-adjusted Treasury bonds: Invest in assets that protect you against the loss of purchasing power, such as Treasury Inflation Protected Securities, or TIPS; Treasury I Bonds; and other investments of that ilk.
*Income annuities with inflation rider: If you're in retirement or on the cusp, consider also investing in immediate income annuity with an inflation rider. Income annuities are insurance contracts purchased with a single lump sum that offer immediate income payments (usually monthly) for a specified period or for the annuitant's lifetime.
*Variable annuity with guaranteed accumulation benefit: If you're several years away from retirement, or you are already in retirement and need to create a bucket for potential expenses some 10 years from now, consider a variable annuity with a guaranteed accumulation rider. This type of rider guarantees that the minimum amount received by the annuitant after the accumulation period, or a set period of time, is either the amount invested or is locked in gain.
*Delay Social Security: One of the best ways to address the risk of inflation is to delay collecting your Social Security, if possible, until age 70.
Learn more at this Social Security website: www.socialsecurity.gov/OACT/quickcalc/early_late.htmllate
*A balanced approach: For what it's worth, firms such as Fiducioso Advisors Inc. plan to launch this year a platform that will enable advisers to build retirement income streams out of a variety of assets. Learn more about this approach at this website: advisorperspectives.com/newsletters10/A_New_Framework_for_Retirement_Income_Planning.php