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How the Cost of Living Impacts Your Retirement Savings

Posted by Michael Kane on Jul 7, 2017 2:44:55 PM
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cost of livingCost of living is defined as the “average cost of the basic necessities of life.” These include expenses like food, housing, utilities, health care, and transportation.

The real estate market, rates of unemployment, the city where you live, and gas prices are all factors that can impact your cost of living. For example, when gas prices are high, shipping costs go up. When shipping costs go up, the price of food and durable goods also increases. If you live in a city with limited real estate inventory, the cost to purchase or rent goes up accordingly.

Inflation and Your Retirement Years

One of the most common measures of the value of money is inflation, and there are two key variables in the equation: the price of goods and, subsequently, the purchasing power of cash. 

Rising inflation means you pay more for goods and services, which directly impacts the cost of maintaining your current lifestyle.

With a few notable exceptions in the 1970s and the late 1980s, inflation has risen at a rate between two and four percent annually. In the context of global economic conditions, the Federal Reserve tends to tighten or ease the money supply to stay within these parameters.

In addition, the average length of retirement in the United States is eighteen years, but it can be longer for some people. Given this timeframe and typical annual inflation, it is easy to see how quickly the value of your retirement savings can change relative to price increases of two to four percent a year. A dollar today definitely does not equal a dollar tomorrow!

Cost of Living and Your Budget

Cost of living is a dynamic measure that can change dramatically, making it difficult but necessary to account for when creating a sustainable budget. In a single year, the price of a gallon of gas can fluctuate as much as 45 to 50 cents, creating a ripple effect that touches several areas of your finances. While you can’t always anticipate these changes, you can work with your advisor to make sure your savings and investments will adequately cover these differences. This will also help you identify areas where you might need to make lifestyle adjustments to protect your assets.

As we’ve noted, the city where you live can have a huge impact on your finances. The absence of state income taxes makes Florida one of the most popular places to retire, while the opposite is true for California or Oregon. It goes without saying that your dollar will go much farther in Memphis, Tennessee than it will in Honolulu, Hawaii.

For many of our clients, retirement is a time to consider downsizing or relocating. It’s also the perfect time to think about the best ways to control your expenses so that you can enjoy the same standard of living on a fixed income. Moving to a less expensive city can free up money for travel or pursuing other goals after your working years.

Awareness of the cost of living in your chosen area of residence is a major step in creating a budget and understanding if you have saved enough money to maintain the lifestyle you want to have. In addition, accounting for future inflation is key when determining if your savings can last you at a sustainable rate throughout retirement. A skilled advisor can help you incorporate these factors into a financial, investment, and savings plan to help you preserve your capital and achieve a successful retirement.

To begin working on your financial plan for retirement, request a consultation with an advisor at RAA.

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Disclaimer: This blog is intended for informational purposes only and should not be construed as individual investment advice. Actual recommendations are provided by RAA following consultation and are custom-tailored to each investor’s unique needs and circumstances. The information contained herein is from sources believed to be accurate and reliable. However, RAA accepts no legal responsibility for any errors or omissions. Investments in stocks, bonds, and mutual funds may increase or decrease in value. Past performance is no guarantee of future results. Any of the charts and graphs included in this blog are not recommendations for the purchase and sale of any security. 

Topics: Financial Planning