To maintain your purchasing power through retirement, you’ll need to consider diversifying your income sources.
The acid rain of inflationThink back to what your salary was in your first job. Chances are you’d struggle to live on that amount today, especially if you received your first paycheck over a decade ago. And that isn’t necessarily because your tastes have become more extravagant, but because the price of goods and services has gone up—in the case of healthcare, they’ve gone way up.
When people embark on the adventure of retirement, they don’t always go in thinking of their income as a “starting” income, even though inflation will continue doing the corrosive work it did throughout their careers. At least when you’re working, there is typically an annual cost-of-living increase and the possibility of merit-based pay raises—neither of which are guaranteed in retirement!
So…how can retirees help ensure they don’t gradually lose their purchasing power, in the absence of a company policy that adjusts its salaries annually?
Let’s look at the three main sources of income for retirees, and assess how well each of them is designed to weather the acid rain of inflation:
1. Pension If you are fortunate enough to have a company pension, your employer is obligated to pay you an annuity at retirement. Around a third of today’s seniors receive income from private company or union pension plans, federal, state, or local government pension plans, or Railroad Retirement, military or veterans pensions.1
Your benefit amount will likely be calculated based on your salary and years of service. As you might imagine, a tenured professor stands to receive a very different pension than that of a part-time teaching assistant. In 2015, the median private pension benefit of individuals aged 65 and older was $9,376 a year. The median state or local government pension benefit was $16,742 a year.1
While automatic cost-of-living allowances are provided for by Social Security, pension plans increase their benefits on a more discretionary basis. And even when annual increases are given, they often fail to keep up with inflation. So several years into your retirement, even if you’re getting a post-retirement pension increase, you may never fully recover the loss of the buying power you had at the onset of your retirement career.
2. Social SecurityLike pensions, Social Security benefits provide a basic stream of income based on how much you earned while working and for how long. If available to you, you should consider having both: The Pensions Rights Center calculates that in 2014, the median income of retirees (with no earnings from work) age 65 and over with Social Security AND pension was more than twice the income of aged retirees receiving just Social Security: While the median income for retirees only receiving Social Security benefits was just $15,871, the median for retirees receiving both Social Security and a private pension was $36,270.1
3. Your savings and investmentsPensions and Social Security together may replace a sufficient portion of your income initially, but generally, they don’t do a very good job of outpacing inflation. The fact is, they often aren’t adequate for the long haul, especially when most 65-year-olds can expect to live for 20, even 30 years more.
Why do I say that? Well, assuming a 2.5% annual rate of inflation, the price of goods will more than double in 30 years. What that roughly means is, you would need more than $2,000 in 2047 to purchase something that costs $1,000 today.
That’s why I think it’s crucial for even “pensioned” employees to avoid complacency—and to realize the importance of saving and taking advantage of any defined contribution plans offered in the workplace.
Think of investments as the third leg to your diversified-income stool Exposing your portfolio to the risk and volatility of the stock market provides more potential for growth—but also for losses—than safer investments like Treasury bonds. Which is why after you stop working and begin spending your savings, you’ll likely want to become more conservative with your remaining assets. But if your strategy is too conservative, your purchasing power may shrivel like a raisin in the sun. Once you’ve decided on an age-appropriate asset allocation, the question becomes: How do you turn your assets into income?
Build a diversified income planWhile there are pluses and minuses to these various forms of retirement funding, the point is to set up a steady stream of income, instead of—or in addition to—pensions and Social Security. And that means multiple sources of income to help reduce the effects of inflation, market volatility, longer lifespans and unexpected costs like healthcare.
Leaving behind the 9-to-5 grind is liberating, because you’re no longer expected to sing for your supper. On the flipside, you can no longer expect promotions or raises, so it’s completely up to you to maintain your purchasing power and to protect your lifestyle in retirement.
1. Pension Rights Center website, http://www.pensionrights.org/publications/statistic/income-pensions, accessed April 2017.
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expert’s opinion or other information you obtain from the Woman2Woman:Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.
© 2017 and prior years, Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017