Retirees in particular tend to be exposed to purchasing power risk, the risk that their sources of income don't keep pace with the inflation of their living expenses. The annual cost-of-living adjustment to Social Security benefits is meant to offset this risk. In practice, however, Social Security COLA's aren't sufficient to maintain retirees' purchasing power when it comes to the goods and services that they actually consume.
In 2021, for example, Medicare Part B premiums have risen by 2.7% from last year, more than double the 1.3% Social Security COLA. And this isn't just a one-year phenomenon limited to Medicare-related expenses. It is estimated that Social Security recipients have lost an alarming 30% of their buying power over the past 20 years, much of that owing to the fact that health care inflation has well outpaced Social Security COLA's.
Two immediate takeaways from this:
1. Retirees need investments in their portfolios that protect them from inflation.
2. Retirement projections need to be stress-tested for the possibility of greater-than-expected inflation in retiree living expenses.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.