How Could Inflation Risk Affect You?

As prices rise over time, inflation begins to affect the ability of people's money to buy goods and services. As people live longer, the severity of inflation increases. Even an annual rate of 3% will reduce your purchasing power by 45 percent in only 20 years. Now imagine living into your eighties, nineties, or beyond; you can see why inflation is worth thinking about.

Here are some important questions you should ask yourself about inflation risk:

Have you accounted for inflation when planning for retirement? Do you receive (or expect to receive) payments from Social Security? Do you receive (or expect to receive) payments from an employer defined-benefit pension plan? If so, will the payments increase with inflation (many will not)? Do you plan to have a lot of fixed-income investments in your portfolio during retirement? Do you expect to have a lot of drug and medical expenses during retirement? Does your health history suggest that you may (healthcare expenses have been rising faster than the general rate of inflation)?