Planning For Today & Tomorrow: How Does Inflation Affect Your Lifestyle?
Inflation might be something that not many people understand. Yet, we all experience it and feel its effects. When you head to the store expecting to spend a budgeted amount of money on something, only to spend a lot more, you’ve experienced inflation. Of course, when a price rises on a product it’s not always due to inflation. Yet, inflation still affects your cost of living by increasing the cost of goods and services.
This is why it’s so important to consider inflation when planning for the future, even if the future is as soon as next year. Especially when planning for retirement, you need to ask yourself what you want as your standard of living because inflation directly affects your lifestyle. Exactly how does inflation affect your lifestyle? It impacts your life in more ways than one.
How Inflation Personally Affects You
Yes, inflation affects everyone. Yet, it affects everyone very differently. Your lifestyle is based on your income and your expenses. Sometimes, people who have a high standard of living but not a high enough income end up borrowing money to make up the difference. When inflation rises, borrowing money becomes very expensive. This means either people take out fewer loans or they’re unable to spend less money because it’s going towards debt payments.
For those people whose standard of living matches their income, inflation can be both a positive and a negative. Usually, when inflation rises, your income also rises as there are adjustments based on cost of living. This is the case for anyone with a current income and also for those on Social Security. However, even with an increased income, expenses also rise. For those on a fixed income – like retirees – inflation can greatly affect their standard of living.
Inflation And Living On A Fixed Income
Usually, as someone settles into retirement, they tend to spend the same year after year. Because of this, they might not notice inflation quite as much. However, this doesn’t mean an increase in prices or rising inflation is not a concern for someone in retirement.
Even as you settle into retirement and spend less than before, the cost of living continually increases with higher prices. Now your standard of living is more expensive and is consuming more of your fixed income. You are now left with one of two choices. You can decrease your spending and standard of living or look to increase your income.
Even so, inflation affects more than the rising cost of items you pick up at the store. It has a substantial impact on health care and long-term care costs as well. Healthcare is probably the biggest expense affected by rising inflation rates that need to be considered when planning for retirement. By appropriately planning for inflation, you can curb some of the impacts of the rising cost of living, including healthcare costs.
Why You Need To Be Planning For Inflation
When inflation rises, it has a substantial impact on your buying power and takes a chunk out of your savings and investments. This means anyone on a fixed income is going to have to budget differently. But, it also means saving more for retirement than you think is necessary to account for the decline in the value of the dollar.
Your savings target must continue to move if you want to be able to afford the same quality of life during retirement. For example, if you think you can live off $3500 a month today while retired, you might want to plan for spending $4500 a month instead for future retirees to account for inflation. This means constantly adjusting your retirement savings plan prior to hitting retirement. Then, during retirement, you need to be reevaluating and adjusting your income to offset the rising cost of living.
For sure, planning for inflation during retirement is a balancing act. At Vector Wealth, our goal is to help you balance your desired standard of living during retirement with such economic factors as inflation. We do this by adjusting your income and expenses to the rate of inflation. Inflation is a very personal experience as it affects each person differently. Your financial plans should be personal, too.
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Vector Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.