Sometimes it's difficult to imagine the significant impact inflation will have on our budget because of the slow and steady pace of price increases. But any retiree can tell you that inflation is one of the most significant financial obstacles to living a comfortable life. After all, a meager 2 percent annual inflation rate since 2000 would mean a 27 percent increase by now. If inflation were just one percentage more at 3 percent, then the increase in prices would be 43 percent.
Here are a few ways retirees can mitigate the impact of inflation on their budget:
Buy a home. There are many reasons to rent in retirement, but one of the advantages of home ownership is that you can hedge against inflation by getting a fixed mortgage, fixing your monthly payment for decades. This is also one of the reasons why over the long term, the average homeowner usually comes out ahead financially, as no one can legally and continuously raise your rent.
Skip some expenses regularly. Inflation will affect your budget less as an absolute dollar amount if your overall expenses are lower. Once in a while, try to skip your expenses. You may find that you really need a cable TV subscription during football season, but you may not need to keep paying for it during the off-season. By stopping the TV bills for a few months, you may even be able to qualify as a new customer again and take advantage of promotional offers such as the one Verizon (VZ) issues for its FiOS service. And if months at a time seems like too little TV time, then at least cancel your subscription during long vacations. You won't be watching TV while you are relaxing in the Caribbean Islands anyway.
Limit lifestyle inflation. There are many expenses that creep up as time goes on, but there are often other expenses, such as electronics costs, that go down over time as well. A major source of inflation is actually self-induced via lifestyle inflation. Instead of driving a beater, we want a decent car and eventually a luxury SUV. Instead of landlines, we now need a cell phone and eventually a smartphone. We shouldn't always deprive ourselves in the name of the future, but don't go overboard either because that's the most direct route to poverty in old age.
Buy stocks of companies that make more when you have to pay more. One way to at least take part in price increases is to invest in companies that benefit when they charge you more. Proctor and Gamble (PG), for instance, is a company that will make more money when the products they sell cost more on the shelves. Oil companies are another example. You won't get back every dollar increase that you have to pay out, but you can share a portion of the price hike that everyone else has to pay.
Inflation may not feel like much when you are working, but it can have a significant impact on the buying power of your retirement savings. These adjustments can help you to minimize inflation's bite.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.
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