Is Inflation Putting Your Retirement at Risk?

The inflation rate continues to increase, which creates a lot of issues for retirement planning, especially if you are on a fixed income. Inflation rose by 7% in 2021, as such a rapid increase hasn’t been seen in the United States since the early 1980s. Understanding how inflation in the US impacts your retirement planning is key to making the best financial decisions while avoiding common mistakes.

What is Inflation?

Inflation is the decrease in purchasing power reflected in the price of goods and services throughout an economy. Inflation can be wide-ranging, whether it’s not enough products being created to keep up with demand or if the price for manufacturing these products continues to rise. Uncertainty throughout the supply chain also creates major challenges in today’s economy, whether the COVID-19 pandemic or the war in Ukraine.

How Inflation Affects Retirement

Inflation is one of the several benchmarks the United States government uses to decide if they need to increase Social Security benefits and contribution limits for retirement accounts. For example, the contribution limit for 401(k) plans went up by $1,000 to $20,500, but IRA contribution limits stayed at $6,000. The legislation was passed in 1973 for cost-of-living adjustments that can be applied to Supplemental Security Income and Social Security to better keep up with the inflation rate. The government increased Social Security benefits by 5.9% in January 2022, which helped combat the high inflation rate.

Why It’s Important to Invest for Retirement

Knowing how much you need for retirement planning varies for each person. However, trying to save up for retirement while using a savings account is next to impossible due to the average interest rate being around 0.06%. The better option is to consider the stock market for investments, as it historically returns 10% each year. Even a lower return on investment can impact financing retirement to help you maintain your lifestyle.

Life Settlement as an Alternative Financing Option

Finding alternative financing options is important if you don’t want to invest your money in the stock market. One alternative financing option is a life settlement, as it’s the process of selling your life insurance policy for greater than its cash surrender value. Still, it’s less than the net death benefit. The transfer of the life settlement allows the seller to receive immediate cash, which is an excellent choice for financing retirement. The buyer of the policy will pay out all future payments and receive the death benefit once the insured person dies.

A life settlement is also different from getting a viatical settlement due to the life expectancy. For example, the insured’s life expectancy on a viatical settlement is two years or less. Many seniors at 70 years or older often feel that their life insurance policy doesn’t meet their needs or become unaffordable, which is why a life settlement is a great choice for financing retirement. Using a licensed life settlement provider or broker is recommended, as they can guide you throughout the entire process.

Should You Consider a Life Settlement?

Weighing the pros and cons of a life settlement is crucial before making any decisions. Life insurance plays a key role in providing financial protection in the event of premature death. On the other hand, selling your policy is a better option if your policy is close to lapsing. Consulting with your financial advisor is recommended in weighing all of your options, as it’s critical to learn all of your alternative financing options while overcoming the challenges of inflation and retirement.

Alternative to Selling Your Policy

Many seniors aren’t aware that there are different options besides letting a policy lapse that’s no longer affordable or needed. These alternative options include keeping the policy in force, whether through a loan or making premium payments from the cash surrender value. Sometimes an accelerated death benefit is also available due to unavoidable circumstances. It’s even possible to gift a policy to a charity. You can also convert it to a policy with a lesser death benefit. Reaching out to a financial advisor is always a good idea to help you determine the best choice to meet your needs for retirement planning.

Closing Thoughts

Dealing with the inflation rate is a major challenge, especially if you are on a fixed income. Finding alternative financing options is key to avoiding these problems, whether investing money in the stock market or selling a life insurance policy. These different options will also significantly impact taxes, as it’s critical to compare all of your options. A financial advisor can work with you in helping you understand inflation and retirement while discussing all of your options for successful retirement planning.