Understanding the inflation rate since 2020
Inflation has been a constant concern for investors and individuals alike since the year 2020. As the global economy faced unprecedented challenges, the effects of inflation have become more pronounced. Understanding the causes and consequences of inflation can help us prepare for its impact on our retirement savings.
Inflation refers to the general increase in prices of goods and services over time. Since 2020, multiple factors have contributed to rising inflation rates. The COVID-19 pandemic, along with government stimulus packages and increased government debt, has led to an increase in the money supply. As more money is available in the economy, the purchasing power of each dollar diminishes, resulting in higher prices.
The inflation rate over the past three years can vary significantly by country and region. For example, in the United States, the inflation rate as measured by the Consumer Price Index (CPI) was as follows:
· 2019: 1.8%
· 2020: 1.2%
· 2021: 6.8%
· 2022: 8.0%
· 2023: 3.4%
These US inflation rate figures indicate that prices increased since 2021 (core inflation, food inflation, and energy prices, gasoline prices, etc.) compared to the previous two years. It’s important to note that inflation rates can have a significant impact on consumer purchasing power, investment decisions, and overall economic stability.
The rate of wage increases can vary based on factors such as industry, location, and economic conditions. According to the Bureau of Labor Statistics, the average hourly earnings for all employees on private nonfarm payrolls increased by 4.9% in 2021. However, it’s important to note that wage increases can fluctuate from year to year and can be influenced by various economic and social factors. Additionally, specific industries and regions may experience different rates of wage increases. For a more detailed and specific analysis, it would be beneficial to research wage increase trends within your particular industry or location.
The rate of inflation has indeed outpaced wage increases in recent years. According to data from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) has increased by an average of 1.7% annually over the past decade, while average hourly wages have grown by only 1.3% per year during the same period.
This trend has resulted in a decrease in real wages for many workers, as their purchasing power has been eroded by the rising cost of goods and services. This has implications for consumer spending, saving, and overall economic well-being.
The impact of inflation on retirement savings
For individuals nearing retirement or those already retired, inflation poses a significant threat to their savings. Over time, the value of money decreases due to inflation, making it more challenging to maintain the same standard of living during retirement. If retirement savings do not keep pace with inflation, individuals may find their purchasing power significantly reduced.
To illustrate this point, let’s consider an example. Suppose you retire with a nest egg of $500,000. Assuming an average inflation rate of 3% per year, the purchasing power of that money will decrease by 30% in just ten years. This means that what used to cost $100 will now cost $130. As inflation continues to erode the value of money, it becomes crucial to take proactive steps to protect our retirement savings.
How inflation affects social security benefits for senior citizens
Social security benefits play a vital role in the financial well-being of senior citizens. However, inflation can erode the value of these benefits over time. Social security benefits are adjusted annually based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). While these adjustments aim to keep pace with inflation, they may not fully protect retirees from rising costs.
One way inflation affects social security benefits is through its impact on healthcare expenses. Healthcare costs tend to rise faster than the general inflation rate, putting additional strain on seniors’ budgets. Moreover, the goods and services that seniors rely on, such as housing, food, and transportation, also experience inflationary pressures. This means that even with cost-of-living adjustments, seniors may find their social security benefits falling short of meeting their needs.
The erosion of buying power due to inflation
Inflation erodes the buying power of individuals by reducing the value of money. As prices rise, the same amount of money can purchase fewer goods and services. This erosion of buying power can be especially detrimental to retirees who rely on fixed incomes and savings.
To illustrate this further, let’s consider a retiree with a fixed income of $3,000 per month. If inflation is running at 3% per year, the retiree’s income will need to increase to $3,090 in the second year just to maintain the same purchasing power. Over time, the retiree may find it increasingly challenging to afford the same quality of life without taking proactive measures to combat inflation.
Strategies to fight back against inflation in retirement
While inflation may seem like an insurmountable challenge, there are strategies that retirees can employ to protect their savings and combat the effects of inflation. Here are a few strategies to consider:
Exploring the option of second jobs to combat inflation
Many retirees find that working part-time or taking on a second job during retirement can help offset the effects of inflation. Not only does this provide additional income, but it also helps retirees maintain a sense of purpose and engagement. Second jobs can range from consulting or freelancing in one’s field of expertise to pursuing a passion or interest that can generate income.
Investing in inflation-protected assets
Inflation-protected assets, such as Treasury Inflation-Protected Securities (TIPS), are designed to provide a hedge against inflation. These bonds adjust their principal value based on changes in the Consumer Price Index, ensuring that their value keeps pace with inflation. By including TIPS or other inflation-protected assets in their investment portfolio, retirees can safeguard a portion of their savings from the erosive effects of inflation.
Starting an Online Business
The advent of the internet has opened up numerous opportunities for retirees to start their own online businesses. From e-commerce stores to consulting services, an online business can provide a flexible and scalable source of income. By leveraging their skills, knowledge, and experience, retirees can generate additional revenue while having the freedom to work on their own terms.
When it comes to online businesses for individuals, there are numerous options to consider. Here are a few popular choices:
1. E-commerce: Running an online store through platforms like Shopify, Etsy, or Amazon can be a lucrative business. According to Statista, global e-commerce sales are projected to reach $4.2 trillion in 2020, highlighting the immense potential in this sector.
2. Affiliate Marketing: 
This involves promoting products or services and earning a commission for every sale made through your unique referral link. This can all be done form the comfort of your own home. According to Forrester, affiliate marketing spending is expected to reach $6.8 billion by 2020, indicating the growth of this industry. See my article on affiliate marketing to get a better idea of how it works and why it may be the right choice for you.
3. Blogging/Vlogging: Creating content through blogging or vlogging can lead to monetization through advertising, sponsorships, and affiliate marketing. According to OptinMonster, 77% of internet users read blogs, offering a substantial audience for monetization.
4. Online Coaching/Consulting: With the rise of remote work, online coaching and consulting businesses have seen significant growth. The e-learning market is projected to reach $325 billion by 2025, as reported by Global Market Insights.
5. Dropshipping: This business model involves selling products to customers without holding inventory. With the global dropshipping market expected to reach $557.9 billion by 2025, as per a report by Grand View Research, it’s a promising venture for individuals.
These options cater to different skill sets and interests, allowing individuals to leverage their strengths in building a successful online business. Keep in mind that success in any online business requires dedication, continuous learning, and adaptation to market trends.
Tips for budgeting and managing expenses during periods of high inflation
During periods of high inflation, budgeting and expense management become even more critical. Retirees should review their expenses regularly and identify areas where they can cut back or find more cost-effective alternatives. This may involve downsizing housing, reducing discretionary spending, or exploring ways to save on healthcare costs. By being proactive in managing expenses, retirees can stretch their savings further and mitigate the impact of inflation.
Seeking professional financial advice for retirement planning in an inflationary environment
Retirees facing the challenges of inflation should consider seeking professional financial advice. Financial advisors can help assess individual circumstances, develop personalized retirement plans, and provide guidance on investment strategies that can mitigate the effects of inflation. A comprehensive retirement plan that takes inflation into account can provide peace of mind and help retirees navigate the challenges of an inflationary environment.
Conclusion
Inflation since 2020 has emerged as a silent threat to retirement savings. The erosion of buying power, the impact on social security benefits, and the rising cost of living all pose challenges for retirees. However, by understanding inflation and implementing proactive strategies, individuals can fight back and protect their retirement savings. Exploring second job opportunities, investing in inflation-protected assets, starting an online business, managing expenses effectively, and seeking professional financial advice are all steps that individuals can take to mitigate the effects of inflation. By being proactive and prepared, retirees can ensure a secure and comfortable retirement even in the face of inflation.
As someone who is close to retirement age myself, I would love to get your thoughts and feedback on issues of making our retirement funds last.
Happy retirement
Bernard
Co-Founder of Empower Marketing