Considering Inflation in Retirement Planning

While inflation for the last few years has not been nearly as dramatic as the late '70s and early '80s, you still need to consider its effects on your retirement nest egg.

Even a historically modest inflation rate of 3% means that your investments must at least earn that return to stay even. For illustration, let's say you currently earn $100,000 a year. If inflation runs at 3 % a year, you will need $103,000 ($100,000 x 1.03) next year. In succeeding years, you'll need to multiply 1.03 times your new figure. So in years two, three, four, and five, you'll need incomes of $106,090, $109,273, $112,551, and $115,927, respectively, just to stay even. In addition, a 3 % inflation rate is low. Over the last 45 years, inflation has averaged 4.5% annually.

During your working career, you can more easily keep up with inflation with salary increases or by working more to earn additional income. When you retire, however, you may depend primarily on your investments. So, in years when the inflation rate is higher than the rate of return on your investments, your only alternative is to cut back on expenses.

The solution to this problem is to invest in assets that will perform better than the rate of inflation. If you invest too conservatively while you are working, you may not build up the asset base you need to support yourself in retirement. And, if you invest too conservatively in retirement, your investments might not keep ahead of inflation.

So, investments that traditionally beat inflation, such as stocks, should play a prominent role in your retirement portfolio. But does that mean your whole portfolio should be invested in the stock market? Probably not. Your portfolio should include a diversified mix of stocks, bonds, and money-market investments. A good mix can provide you with inflation-beating returns without taking undue risks.

Retirement can be the most rewarding period of your life. We can help you get there in comfort with our investment programs. And, once you retire, we can help you conserve your nest egg with our asset management services. Please call us if you want more information about our products and services.

Emily S Hazlett is Vice-President:Investments at ENB Associates Inc. a wholly owned subsidiary of Evans National Bank. Securities are offered by O'Keefe Shaw Co.,Inc. Member NASD and SIPC.

ENB Associates Inc. is a wholly owned subsidiary of Evans National Bank. Securities are offered by O'Keefe Shaw & Co., Inc. Member NASD, and SIPC. Products purchased through O'Keefe Shaw may lose value, are not deposits with obligations of, or guaranteed by Evans National Bank or affiliates and are not insured by the FDIC.