According to Forbes.com, the latest economic projections indicate inflation will drop from 3.2% in 2023 to 2.4% in 2024. The same article credits the Federal Reserve for doing “an excellent job bringing down inflation in 2023 while avoiding a U.S. economic recession.” However, experts expect inflation to remain above the Federal Reserve’s 2% inflation target throughout 2024.
Understanding Sticky Inflation
If you’re still feeling the pinch at the cash register it’s due to what’s known as Sticky Inflation. Sticky Inflation occurs when prices are slow to change in response to monetary adjustments. In other words, once prices on certain consumer goods get high, it takes a long time for them to come down even as overall inflation rates drop. Some experts say sticky inflation will come to an end in 2024 while others are less optimistic.
Inflation Erodes Our Purchasing Power
As we all learned in 2022 when inflation hit a record high, inflation erodes our purchasing power. For example, if you found a $20 bill that was tucked into a book 20 years ago, you wouldn’t expect to buy as many items with that $20 today as you could two decades ago. As you can see, inflation can significantly diminish the purchasing power of your FERS annuity (pension) and Social Security over a 20-to-30-year retirement.
“Your TSP nest egg may well be your only protection against inflation in retirement.”
Anticipate Inflation In Your Retirement Plan
To protect yourself against inflation in retirement, you need to calculate how it will impact your income once you’re no longer working. For example, the historic average of inflation comes in at around 3% per year. This means $60,000 of retirement income today will have the purchasing power of a bit over $33,000 in 20 years. Once you crunch the numbers, you may find you’re in danger of dealing with an income gap in the midst of your retirement.
Your TSP Can Help Protect Against Future Inflation
Under FERS, you have two sources of fixed income: your annuity (pension) and Social Security. Your third stream of income is the one only you can control: your Thrift Savings Plan (TSP). Though you’ll receive Cost of Living Adjustments (COLAs) on your pension and Social Security, studies show that COLAs have not been keeping up with creeping inflation over the years.
Your TSP nest egg may well be your only protection against inflation in retirement. That’s why it’s important to max out your contributions and take full advantage of Catch-Up Contributions when you turn age 50.
Connect FRC® trained advisor who can run a no-obligation report to help you calculate how inflation will impact your retirement.
Source: https://www.forbes.com/advisor/investing/inflation-outlook-2024/
