ALAN S. MOORE

How inflation gobbles up your retirement While the annual rate of inflation has been right around 3 percent for most of the 1990s, the inflation was higher in the 1980s, and evenhigher during the 1970s. If your retirement plan investments provide you with an annual return of 5 percent and inflation is averaging 3 percent per year, your real rate of return is only 2 percent. At that annual rate of return, you won’t see much real growth in your retirement assets, no matter how much you contribute to your plan. When Tony retired a little more than five years ago, his employer’s retirement plan guaranteed him $20,000 a year for the rest of his life. And during his first year of retirement, the living expenses Tony had to pay from that $20,000 were only $15,000. So, as Tony walked down the fairways of his favorite golf course, he though he had it made. Then, inflation began sneaking up on him. Tony noticed that his $15,000 in living expenses were increasing by about 3 percent a year. That meant those expenses rose to more than $17,000 in the five years since retirement due to inflation. Since Tony’s $20,000 annual retirement payment did not increase with the rate of inflation each year, he knew it was only a matter of time before he’d either have to cut back on his expenses or, somehow, increase his income. Reluctantly, Tony went back to work on a part-time basis.

You Can Stay Ahead of Inflation

Most likely, when you retire, you’ll want to retire for good. You won’t want to go back to work, like Tony, to pay your bills. What can you do to make sure that you stay well ahead of inflation, both during your career and in retirement? You can do two things: Contribute the maximum amount you can to your retirement plan, and Choose investments that consistently beat the annual rate of inflation. Simply participating in your retirement plan may not be enough. If you contribute a minimum amount during the course of your career, you may find it difficult to accumulate sufficient retirement assets. Even if you start with small contributions, try to gradually increase your level of contributions with each pay raises. When your pay and retirement plan contributions increase together, your budget remains intact, and you’ll be contributing a higher dollar amount. However, you must also make sure that your investments outperform the rate of inflation. ALAN S. MOORE is a Financial Advisor of Legg Mason Wood Walker, Inc., a diversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. and SIPC.