If you’re a FERS participant planning to retire in five to 10 years, you may have to start contributing more to your Thrift Savings Plan (TSP) to weather the storm of rising inflation over a long retirement. Even if inflation continues at the historical average of 2% to 3% per year, it could possibly double the income needed to cover your living expenses 20 to 30 years from now.
What Causes A Spike In Inflation?
Demand-pull inflation is caused by rising consumer demand for products and services. Commonly known as the Rule of Supply and Demand this happens when fewer products are available in the marketplace and consumers have to pay more to buy them.
Cost-push inflation is the type of inflation triggered by the Covid-19 pandemic. It happens when businesses have to pay more for raw materials and higher wages to attract workers. When the pandemic caused a worldwide labor shortage and an international disruption of the supply chain, the higher production costs were passed on to consumers. As a result, inflation spiked to 9% in 2022.
Currently, we’re experiencing what’s known as sticky inflation. In other words, higher prices on certain consumer goods tend to stick and it takes time for these prices to come down – even as overall inflation rates drop. Some experts say this trend is coming to an end in 2024 while others are less optimistic.
“If you’re blessed with longevity and a 30-year retirement, inflation eats up even more of your savings.”
Crunching The Numbers: How Inflation Eats Up Your Retirement Savings
Let’s say you’re withdrawing $60,000 for your first year of retirement income. At a 2% inflation rate, 20 years from now that amount would need to be $89,000. And if inflation rises to 3%, your $60,000 retirement income would need to rise to nearly $109,000 to maintain your buying power.
If you’re blessed with longevity and a 30-year retirement, inflation eats up even more of your savings. At a 2% inflation rate, 30 years from now your $60,000 yearly withdrawal would need to hit $109,000. At an inflation rate of 3%, in 30 years your $60,000 retirement income would have to rise to a whopping $145,000 to keep pace.
Will Inflation Spike Again Like It Did In 2022?
There’s no guarantee inflation won’t spike again in any given year over a 20-to-30-year retirement. However, even if inflation on consumer goods remains within the historical average of 2% to 3%, healthcare inflation has been driving up the cost of medical care by around 8% in recent years. To discover strategies that can help mitigate the impact of inflation on your retirement income, connect with an FRC® trained advisor.
