Coping with inflation in retirement. Spending power going down….

Out of curiosity I looked at the impact of inflation in my pension. I found that based on the CPI my spending power has dropped by 42% since starting my pension in 2009. What I could buy for $1.00 now cost $1.42. My pension has no COLA and will never increase.

How does one cope with inflation in retirement?

First, the CPI is not my CPI or yours for that matter. What really matters is your personal CPI based on how you spend money. For example, my housing costs are mostly fixed. I don’t rent or have a mortgage, nor am I going to buy property. My HOA fee and property taxes have increased somewhat.

I drive, but don’t commute. It’s just my wife I so our food costs are not high and we spend minimally on clothes. You get the idea.

Second, contrary to conventional advice I didn’t retire until my income stream – pension and Social Security in my case – equaled my working base salary at age 67. Thus I built in a cushion for increased uncontrollable spending. The source of ones retirement income doesn’t matter, the principle is the same. Strive for an initial 100% replacement of base pay.

This is a valid goal regardless of the source of ones income stream.

Of course, our Social Security has increased, but those increases have largely been consumed by higher Medicare and supplemental coverage premiums.

I realize this approach may be too conservative for many, especially those seeking early retirement, but so far it has worked for us. starting retirement with more than you need, not assuming a significant drop in spending upon retirement provides a nice cushion.

How long will this financial cushion keep us afloat so that we are not forced to cut back? Good question. It appears inflation in lessening. In addition, I also built in a hedge.

Over many decades I have invested in a few dividend paying stocks and bond funds that generate monthly interest, some tax-free. Those dividends and interest have been reinvested, but now I have the flexibility to stop all or some of the reinvesting to generate additional income as needed.

If you do not have a pension, build these inflation hedge investments outside your qualified retirement plans (401K, IRA, etc.)

No‼️

You don’t have to be wealthy to do this, the amounts involved are all relative to ones income. Also, keep in mind that lower income retirees receive greater relative inflation protection from Social Security