How Inflation Can Affect Your Retirement

Bob Freeman:Inflation can cause havoc on a retiree's savings. With people living well into their 80's, 90's and in many cases, even longer these days, their retirement money has to last longer than ever before. Even slight inflation can make that tough. For instance, if the nation's standard inflation rate remains at a mere 4%, the money today's retirees have in 20 years will only be worth 44% of its current value. That means that every dollar they spend in the future will only buy them 44 cents worth of product -- a scary thought for those who are counting on a set annual amount to live on.

What exactly is inflation and why does it eat away at retirement savings so much? Inflation is simply the tendency of prices to increase over time. A moderate inflation rate usually does not bother the average working consumer much since even small annual pay raises help to offset it effects. But for retirees who must live on the same monthly amount today, next year and ten years from now, inflation can mean the difference between living a comfortable life in retirement and struggling to make ends meet.

So, what's a retiree to do? According to financial experts there's no real way to cure the ill effects of inflation on retirement. But, there are a few ways to lesson it:

Diversify Investment Risks

Smart investors know that the time to lower investment risk is after retirement, right? Maybe not. While most financial experts agree that retirement is not the time to take big risks in the stock market, it may not be the time to rely only on low-yield investments either. It's impossible to earn higher returns without taking some risk, so if you plan on changing investment strategies do so smartly: diversify.