Unfortunately, most people do not have a written financial plan. Many create a spending plan in their heads and hope they have enough income to support it. There are several important parts that are often neglected, and one of these is having a plan for inflation.

Inflation is prices going up and eroding your purchasing power. We know most things are going to cost more in the future. During our work years, hopefully we are receiving wage increases to help us keep up with inflation.

Someone who was born in 1953 might be surprised to see how much prices have increased. That year, the national average price for a house was $16,937, car $2,552, gallon of gasoline 29 cents, gallon of milk 36 cents, loaf of bread 17 cents and a postage stamp 3 cents.

While the cost of goods was very low in 1953, so was income. The average American worker earned $1,970 per year.

Some retirees today will live for another 30 years and should plan for inflation. Many pensions do not go up to help cover inflation. The standard default option for many pensions is 50% to a surviving spouse.

We know that at the first death, one Social Security check will go away. We discussed several weeks ago about how taxes for a surviving spouse could easily go up 442%. We know living expenses do not go down much upon a first death.

While having an inflation plan won’t fix all of these problems, the situation is much worse without one.

This is one reason that Social Security maximization is an important subject. SS is one of the few retirement assets that have a cost-of-living index. If your check would be $2,400 at full retirement and had an annual cost of living increase of 2.8%, this is how your monthly benefit would grow. In 10 years, your monthly check would be $3,164, 20 years $4,169 and 30 years $5,495. These increases do not allow you to buy any more, just the same when adjusting for inflation.

Think how difficult it would be to maintain your lifestyle if you did not have rising income. Today, many retirees are dependent on 401(k) plans for much of their income. If the stock market were to correct early in retirement, they could suffer sequence of risk. This could wipe out retirement income, just the opposite of having a plan to deal with inflation.

While there never is a good time to have a market correct, there is a worse time. That is just before retirement or right after starting it.

Having a written plan is the best preparation. Make sure that it deals with taxes and inflation, both of which could derail the best-laid plan.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.

Business Writer

Rick Shrum joined the Observer-Reporter as a reporter in 2012, after serving as a section editor, sports reporter and copy editor at the Pittsburgh Post-Gazette. Rick has won eight individual writing awards, including two Golden Quills.

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