If you’re worried about how inflation could eat into your savings during retirement, you’re not alone.
Some even feel panicked
“We looked across all demographics, and (that fear) was pretty consistent,” with younger demographics slightly more concerned, says Katie Libbe, vice president of consumer insights at Allianz Life, the insurance company. Nearly half of those surveyed (47%) say they’re very worried that rising costs would mean they won’t be able to afford the lifestyle they want in retirement. About 1 in 10 even describe their fear of inflation as “panicked.”
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How concerned should you be?
Allianz also says most people greatly overestimate these concerns.
- More than a third of survey respondents say they believe the cost of living will rise 3% to 4% every year during their retirement.
- Nearly 20% say they expect to see annual increases of 5% to 6%.
- Almost 1 in 10 (8%) say prices could rise more than 10% each year during their retirement.
The reality: Over the last 20 years, Americans saw an average inflation rate of 2.24%. In March, the Department of Labor’s data found that consumer prices rose only about 0.1% from the previous month.
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Figuring out heuristics
It’s common for people to make extreme decisions based on limited information, says Victor Ricciardi, a finance professor at Goucher College in Baltimore. If investors see a video news story online in which, say, an economist forecasts inflation rates of 5% to 8% a year, many will automatically accept the prediction as accurate. Ricciardi says these investors suffer from a bias known as the availability heuristic, or the human tendency to focus on easily accessible, simple-to-recall information.
Folks and their fallacies
Another reason for the high estimates, Libbe says, is that the rate has been low for so long that people believe it has nowhere to go but up. “I was around when it was 10% to 12%, so I can remember working for a bank and paying down mortgages at 18%,” she says. “But a lot of people don’t know anything about that.”
Brigitte Madrian, an economics professor at the John F. Kennedy School of Government at Harvard University whose research is in behavioral economics and investor behavior, admits inflation has been low for the last 20 years. However, she says, “there are periods of time during the lifetimes of (some people) when it has been much higher. Even if the inflation rate is low, its effects add up over time if sources of income in retirement are not indexed to inflation.”
Medicine is the exception
While inflation overall has been low, that’s not true of health care. “The rate of price inflation for health care has generally exceeded that for overall prices by quite a lot,” Madrian points out.
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