Inflation is a major danger to the financial security of retirees, and the price increases that don’t make headlines often covertly hurt retirees the most.
In 2021 and 2022 prices increased almost across the board, generating the highest inflation rates in more than 40 years.
Headline inflation has declined since, but prices for select goods and services continue to spiral higher.
Homeowner’s insurance premiums were rising before the general inflation of 2021 and 2022 and continued to rise faster than the major inflation indexes.
From 2018 to 2013, homeowner’s insurance premiums in the U.S. increased 33.8% on average. Premiums increased almost 60% in Texas and Colorado.
But not every state saw sharp premium increases. Vermont and Alaska saw increases of around 6%. States with increases of 12% or less were West Virginia, South Carolina and Maine.
The causes of the premium increases aren’t a secret.
Home values have increased, and that leads to higher insurance costs. Likewise, construction and repairs costs have increased in most areas.
In some states, weather or natural disaster events have caused widespread and expensive damage to homes.
Electricity prices also have been increasing faster than general price inflation.
In 2023, residential electricity rates across the country increased 6.3% over 12 months, the highest annual increase since 2000 and about double general consumer inflation.
That’s a big change. Between 2013 and 2023, residential electricity prices increased at about the same rate as general consumer inflation.
But analysts now anticipate residential electricity prices will increase faster than general inflation for a while.
Demand for electricity is surging, caused primarily by the large amount of power needed by data centers for artificial intelligence and other technology.
Another factor is that power companies must repair and maintain their infrastructure. The cost of copper wires, cable and other equipment is increasing faster than general consumer inflation.
In the past I’ve said inflation is the most overlooked factor in most retirement plans. The price of almost everything you buy in retirement is likely to increase.
Retirees need to be aware that retirement is likely to last 20 years on average and longer than 30 years for a sizeable minority of people.
Even modest inflation of 2% or so can diminish purchasing power substantially over that time.
Inflation needs to be an important element of every retirement plan. There are several way to plan for inflation.
The investment plan can be structured so that income and cash flow are likely to increase over time to compensate for rising prices.
There can be flexibility in the spending plan so that some expenses can be reduced or deferred to accommodate cost increases in other items.
The retiree also can also keep a financial cushion in anticipation of inflation. The spending in the early years of retirement might be a bit less than it appears the retiree can afford.
It’s important for retirees and pre-retirees to anticipate that the prices of everything they buy during retirement will increase and have a strategy to implement in case prices rise faster than expected.
