What inflation adjustments mean to your retirement

What inflation adjustments mean to your retirement

| October 21, 2020
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Social Security and Federal government retirees will receive a 1.3% cost of living (COLA) increase effective January 2021. The not-so-good-news is that while 1.3% is more than many expected, it won’t be enough to cover higher living costs that most retirees must contend with. That includes health insurance premiums which are expected to rise in 2021 for many federal employees and most retirees.

The standard premium for Medicare Part B is $144.60/month in 2020, and it had been projected to increase to $153.30/month in 2021. But in October 2020, the federal government enacted a short-term spending bill that includes a provision to limit the Part B premium increase for 2021. More to come on the final premiums for 2021 Medicare.

What we see each year is that cost of living adjustments for Social Security and federal retirement annuities don't quite keep up with overall spending inflation. Compounding this is that health care out of pocket costs and insurances grow at an even greater rate each year than "regular" spending and retirement benefits.

For this reason, we model health care costs separately from other spending in our client retirement projections so that we can account for the increasing larger bite each year from medical expenses. Similarly, long term care costs also increase at rates greater than retirement COLAs. The medical portion of long term care costs rises faster than the real estate portion of long term care facilities, so we use different inflation factors for each of these. This is why clients will see so many different "spending goals" in their financial plans as inflation becomes such an important factor over a 20 to 30 year (or more) retirement time line.

To keep up with inflation, retirees need to have other means for their retirement income to grow so that their spending power doesn't erode over time. That generally means stocks in your investment portfolio. Depending on your time horizons, risk tolerance, and capacity to take risk, a portfolio ranging somewhere between 40% and 60% stocks is a good place to start. This is both an art and a science and something we take very seriously.

In developing your financial plan and investment strategy, we look carefully at the projected growth of all of your various anticipated spending needs: basic living expenses, health insurance and Medicare and out of pockets, long term care facility/CCRC buy ins, long term care services, future home purchases, as well as various discretionary expenses such as cars, entertainment, travel, and gifting/donations. 

Adding to the modeling of inflation factors, we account for the fact that not all expenses will continue for your entire life. Travel might taper off. A new car might not be on your mind in your 90's. Retirees also tend to change spending habits over time as they transition from "go go" to "slow go" to "no go." This has been described as a "spending smile" where discretionary spending such as travel is high in the "go go" years and health care and long term care spending is high in the "no go" years.

We put a lot of time, thought, research, and conversation with our clients as we build this multi-layered model so that we can provide you with the best advice possible for your important decisions. And then together we update this as your life changes, helping you stay on track regardless of what life throws at you.

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