It is essential to put money aside for retirement – the earlier you start investing and growing your assets, many argue, the better. However, the growth of assets is imperative throughout your retirement, not just leading up to it. It becomes especially important if we consider today’s inflation concerns as well as the possibility of higher inflation in the upcoming years.
So, with this in mind, will your retirement savings be eaten away by inflation?
If you are nearing retirement, you may already be planning your future adventures. Maybe you’re ready to travel the country or abroad. Perhaps you’re excited to remodel your home or start regularly practicing a hobby you’ve always enjoyed. Whatever those plans may be, the costs can add up quickly.
What if we disregarded all of these additional costs and focused only on two essentials: housing and food? Just how much of your assets will inevitably go to those two necessities with potential rising inflation rates factored in?
How Much of Your Assets Will be Eaten Away?
According to the U.S. Bureau of Labor Statistics Consumer Expenditure Report 2019, the mean average annual expenditure on food was $8,169. That boils down to an average of $7.46 a meal.(1)
We’ll use this number for our example. That means you have only $7.46 to spend per meal, per day. So if you spend a little more on one meal, you have to reduce what you spend on your other meals that day. It also means that anything you spend in-between meals reduces the amount that you can spend per meal that day.
This budget includes your favorite cup of coffee, a glass of wine, or a beer while watching the game. According to U.S. News, the average cost of a cup of coffee —sans milk — is $2.70. So, it’s not hard to imagine just how quickly that $7.46 could be gulped up.(2)
With all this in mind, how much of your assets do you think you will quite literally eat over the next 25 years, spending only $7.46 a meal?
Food inflation has averaged about 2.37% between the years 1996 and 2020 (US Inflation Calculator).(3) We’ll start with a more conservative number – 2% annual inflation.
That results in $261,821.21 spent on food alone. What if the inflation rate was 3%? You’d be spending $298,026.03 on food. Let’s say the inflation rate went up to 4%, as it did in 1972 and 2007, that’s $340,424.63 on food.(4)
And, if you decide to feed your partner as well, those rates double to $523,642.42, $596,052.06, and $680,849.26 respectively.(4)
Remember, this is spending only $7.46 per meal, every meal. Chances are, this is a conservative number if you consider a night out at a restaurant with family or friends.
What if we factor housing into the equation?
Food is an expense that you cannot avoid. The same goes for housing. So, let’s take a look at what happens when we factor living costs into these retirement expenses.
According to Assistedliving.org, independent living communities can cost anywhere from $1,500 to $4,000 a month.(5) For our example, we’ll focus on the lowest average cost of living in an independent living community: $1,500.
We’ll assume that inflation will be 1% per year for these housing expenses, again assuming annual inflation adjustment. In that case, you would hypothetically spend $508,377.59 on housing over 25 years.(4)
Adding together 25 years of food at a 3% interest rate, and 25 years of housing at a 1% interest rate, a couple who lives what we consider a modest lifestyle would still be spending around $1,032,020 over 25 years.(4)
Again, this amount does not include your travel plans, entertainment, hobbies, recreational activities, home remodels, gifts, doctor bills, medication, or other expenses that you may rely on for a happy and healthy retirement. With these costs on the horizon, it is essential to continue cultivating your assets throughout retirement.
Given that we have used the conservative inflation rates of 1 and 3%, it is also imperative to consider the possibility of higher inflation rates in upcoming years.
A sensible financial plan with a rational growth objective may help you prepare for a comfortable and lasting retirement. This is where a financial advisor can help you build a diverse portfolio, assess your risk tolerance, and allocate your investments according to your personal goals. And of course, allocate spending for some great meals too!
Don’t Let Your Retirement Savings Be Eaten Away by Inflation
We understand how important it is to feel comfortable and prepared as you step into retirement. Dunham is here to assist you as you work toward your investment goals. If you have any questions about how our team can help, get in touch with us today. You can call any of our regional directors or complete an online form on our contact page.
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(3) www.usinflationcalculator.com, “Food Inflation in the United States (1968-2021).”
(4) Dunham & Associates Investment Counsel, Inc.
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