If you work in the United States, you are privileged to be participating in what is probably the most popular inflation protected investment and that is: Social Security.
When you are considering your inflation protected savings, make sure to take Social Security into account. We are told that for most retirees today, this is the largest source of income they have and it would appear that this trend will continue for most of us as we move into retirement as well.
Raises for Retirees?
For retirees, it may come as a pleasant surprise that their benefits go up from time to time. It probably feels like they are getting an raise, but that’s really not the case at all. What’s actually happening is that Social Security is linked to an inflation index. When that index signals that inflation has happened, you are entitled to an increase in benefits to make up for it. You are not getting any more real value. It’s just a way to make sure that your money continues to have the proper amount of buying power based on changes in what the dollar can buy. Another way to put it is that you are merely able to continue to pay your bills as they go up over time.
An Important Planning Consideration
As we are considering our long-term savings, it’s important to include Social Security in the mix. It is likely that most of our income will be coming from this program when we retire. In order to determine how much income we will need in retirement from other inflation protected sources, we really should consider what Social Security will already be covering in order to get an accurate picture.
When we are planning for retirement, it is helpful to know how much money we actually need to live on first. That’s the amount of money that you must have to pay all of your bills. Since these costs go up and they are not something that you can decide to stop paying, the income for them must go up too, even when you don’t work anymore. If your Social Security income isn’t enough to pay for your needs, it would be nice to know that now before you retire, otherwise you may think you have enough money to retire when you actually don’t.
Getting an Estimate
It’s extremely easy to get an estimate in order to help you with your retirement planning. The Social Security website has a calculator you can use called: The Retirement Estimator. It allows you to enter your Social Security Number and the amount of money you earned in the last year, then it uses the information as well as your income history from tax records to determine what you can expect to be paid each month at various dates of retirement. You can then take this information and compare it to how much your bills are today. That difference is the amount of income you will need to come up with in order to retire safely.
If you find that you are lacking enough money to live on, it means that you will need to keep saving now so that you can make up the difference. This amount should also be inflation protected so that you can keep up with your bills when you stop working.
If you find that you already have enough to live on based on your Social Security estimate, then you should probably consider what you can do to invest your money instead of merely saving it. That means that you probably don’t need to be as careful to have guarantees of inflation protection but may take a bit more risk since you probably won’t have to cash out your investments at a particular point in time to pay bills.
An Important Inflation-Protected Investment to Consider
When you use the Social Security Estimator. You will find that it gives you different numbers based on when you start taking your Social Security benefits. At the time of this post, it usually gives you three. One for early retirement, one for on-time retirement and one for waiting for maximum retirement age of 70. You will notice that there is a dramatic difference between taking your income early compared to waiting until you are 70 and this illustrates what might be the most simple and beneficial inflation protected investments a person can have.
It is estimated that by waiting to receive your benefits, you automatically receive an 8 percent increase in payout per year. You might be able to beat this on the stock market, but then again you might not. This may be the highest-paying, guaranteed, inflation protected investment we have, and it’s available to everyone if they will only wait to receive their benefits. It only works up to age 70, though, and then you might as well take the benefits because they don’t go up anymore.
The Good News
The great news about this investment is that you don’t have to do anything more than you are already doing in order to participate. Just keep working hard. In fact, your estimated income usually goes up when you earn more.
Second, since you already have Social Security, you are off to a great with your inflation protected savings.