Aug
Inflation and Retirement: Understanding the Basics
Written by Leo FranklinInflation has been an almost constant presence in the U.S. economy over the past century. This fact alone should calm some of the concerns many retirees have about inflation. For the most part, inflation is a benign force in the economy moving prices slightly higher. There are two times when that changed – in the Great Depression and in the 1970’s.
Deflation appeared in the Great Depression and declining prices proved to be just as much of an economic challenge as rising prices. In the 1970’s, inflation soared and the suffering was widespread. From these examples, it seems like extreme moves in prices are the danger that retirees face rather than slow and steady inflation or deflation.
This observation is based on the fact that the U.S. has done well with slow inflation while Japan has done well with slow deflation for most of the past ten years. Doing well is a relative term, with a slow economy being seen in both countries.
A quick lesson: how economists evaluate inflation
In economics, it is generally safe to assume that the current trend will continue for a time. Eventually the trend changes and that change is usually sudden. That’s why you need a diversified financial plan. Some investors own a little gold to help offset the danger of rising prices and other investments that should grow if prices fall. Your home should be at the center of your financial plan.
Home prices have generally moved in line with inflation, delivering long-term gains that match long-term price changes. That makes your home a perfect asset for retirement planning. A home that you bought years ago should be more valuable, even after the market crash of the past few years. That home can now be a source of income.
Unlocking the income in home equity can seem like a challenge since many financial plans do not consider that possibility. A reverse mortgage actually makes the process simple. There are no income or asset tests, making a reverse mortgage perfect for retirees who would not qualify for a traditional mortgage.
Inflation could have a large impact on your retirement if it reappears suddenly. We have to hope that the Federal Reserve can prevent that. We have to plan on low inflation being a constant throughout retirement. A home can appreciate in value in that environment and that can increase your wealth. A reverse mortgage converts that wealth to income, and makes inflation a manageable part of retirement.
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