Inflation has been front and center in the news media lately. The war with Iran has exacerbated an already difficult economy for many, with soaring prices for everyday necessities, including food and gasoline.

Locally, when constantly rising prices are coupled with extremely high housing costs, it can be difficult for some to save for retirement.

With elevated inflation levels, planning for retirement becomes more difficult, too. However, proper retirement and estate planning must incorporate the expected impacts of inflation.

A simple example of expected expenses will help put inflation into perspective:

As you can see, the difference is striking. Keep in mind that 4% inflation is still relatively low, compared with some previous periods, like the 1980 through 1982 recession when inflation peaked at nearly 15% in March 1980.

So, what are we to do? We can’t simply ignore the effects of inflation.

Proper retirement and estate planning must incorporate some kind of estimate for future inflation. Once those estimates are established, a forecast for income and expenses must be completed.

If that forecast shows a potential deficit, some hard decisions must be made to attempt to address the deficits.

There are only five ways to handle a probable deficit in retirement income:

• Reposition existing assets to produce greater appreciation and income than they are currently producing.
• Save more money now to accumulate a larger fund at retirement.
• Plan to liquidate assets marked for conservation.
• Plan to borrow money when the need arises (this is risky).
• Plan to lower expenses or reduce your future standard of living.

These strategies are not mutually exclusive, and they may need to be used in various combinations. The implications of each deficit reduction strategy should be understood before a decision is made.

Repositioning Assets

Repositioning existing assets consists of making strategic changes to your portfolio to acquire investment products better suited to meet long-range needs, given the expected impact of inflation.

The goal of repositioning assets is to eliminate, or at least reduce, any expected future deficit.

If a deficit is likely to remain, one or both of the following two strategies will then have to be considered: 1) increasing current savings or 2) liquidating assets marked for conservation.

Increasing Current Savings

The least costly and painful way to eliminate a retirement income shortfall is to save more now.

To implement this strategy, it will be necessary to determine how much more you must save and invest before retirement, on a regular basis, to offset any projected retirement income deficit.

This method takes advantage of the time value of money, or compounding, and should not be as painful as the prospect of having to liquidate, at some time in the future, assets that had been earmarked for conservation.

This is, of course, a key consideration for estate planning as well, for any assets that you plan to pass-on to heirs, charities, etc.

Liquidating Conservation Assets

A well-reasoned retirement or estate plan should include a priority list for liquidating assets marked for conservation — personal residences, vacation homes, unimproved real estate, art, jewelry, stamp or coin collections, and the like.

If the financial burden of increasing your savings and investment is too great, you will be prepared to liquidate conservation assets in the least objectionable order.

The income streams from each liquidated asset can then be subtracted from the projected retirement income deficit until that deficit is eliminated.

Borrowing for Personal Consumption

An alternative to selling conservation assets would be borrowing to make up a deficit in retirement income.

This is generally not recommended, but it is an option that can be considered.

It is typically costly to borrow due to the interest cost of the borrowing. Loans must be repaid eventually, even with a reverse mortgage or whole life insurance policy.

Lowering Expenses

The final alternative, lowering one’s expenses or doing without, is really not a strategy.

This will occur by default to individuals who 1) are unable to bring together the resources needed to meet their retirement income goal or, 2) after retirement, choose or are forced to spend more than was planned (usually due to higher than anticipated inflation or unexpected healthcare costs).

No one wants to find themselves in this situation, so proper planning earlier in life is essential.

Conclusion

Unless an individual is wealthy, or has very low expectations with respect to a post-retirement lifestyle, there’s probably going to be a need for more money than is available at the onset of planning.

There are two other options available: 1) going back to work after retirement and 2) delaying retirement until the retirement income goal has been met.

Planning for a specific retirement date is the goal of the retirement planning process. Having to postpone retirement, or retiring and then being forced to go back to work, are unattractive outcomes that everyone wishes to avoid.