Careful Planning to Stay Ahead of Rising Inflation

As we head into the home stretch of 2011, consumers are continuing to see inflation take more money out of their pockets. The latest Consumer Price Index numbers for September released by the U.S. Bureau of Labor Statistics show an increase of 0.3 percent, bumping the annual all items index, or rate of inflation, up to 3.9 percent from the previous 12 months. That annual CPI increase is the largest we've seen in three years.

Inflation impacts what consumers pay for, things like food and energy. The food index increased 0.4 percent in September and is 4.7 percent higher than this time last year. Energy prices also rose 2.0 percent in September, with gasoline up 2.9 percent from the month before and 33.3 percent over the past year. The things we need are costing more and more to afford, yet most people's incomes are not keeping the same pace. Inflation can be especially devastating for retirees.

If upon entering retirement you did not plan ahead for inflation, then through the years, your purchasing power will begin to diminish. Think about it. In 2003, a gallon of milk cost approximately $2.76, and today, it's priced around $3.50. That's a 74-cent increase in just eight years. Imagine what a gallon of milk will cost in 20 or even 30 years into retirement.

Rather than face the possibility of downgrading your lifestyle in retirement, consider the following four tips to help you protect your future purchasing power from the potentially devastating effects of inflation.

Analyze your income to make the most of your money. One of the first things you can do in an effort to maximize your savings in retirement is to perform an income analysis that can determine if you are using your current income sources properly and in the most tax-efficient manner.

With the ever-increasing cost of inflation, it is very important to find out if you have adequate savings and income to meet your future needs as well. Your actual inflation rate may be different than the published inflation rate by the government, as your rate is based specifically on where you spend your money. The CPI is an index of several different economic sectors, such as food, gasoline, shelter and more. So, for instance, let's say you're only purchasing gasoline, your actual inflation rate would be around 33 percent, not 3.9, during the past year. The various goods you purchase determine your actual inflation rate.

Keep your buying power up by paying your debt down. If you have substantial loans or debt with variable rates, it is important to consider paying them off or consolidating them and locking in a lower rate, especially during times of rising inflation. Not only will you be paying even more for those things you purchased in the past due to the decrease in value of the dollar, but interest rates may begin to increase with inflation as well.

Stay ahead of the rate of inflation. If you want to invest conservatively, you may need to think twice about the "safety" in bank-issued Certificate of Deposits or other vehicles with set return rates of interest. If you're earning anything less than 3.9 percent annually, the account may be costing you purchasing power. You may want to consider exploring other safer options that can at least keep up with the CPI, such as bonds or insurance products with an inflation rider.

Fix your fixed income. If you're in retirement and are living on a fixed income, inflation can be especially difficult. Following the most recent rise in inflation, it was announced that the Cost of Living Adjustment will return in January of 2012 with a 3.6 percent increase in Social Security benefits. While that is good news for retirees who have not seen an increase the previous two years, the COLA rate is less than the actual rate of inflation. Other alternatives to consider include dividend income and fixed annuity laddering.

Be sure to consult a qualified professional to help ensure that your money stays ahead of inflation and continues to work for you well throughout the retirement years.

SOURCE: http://www.hendersonpress.com/business/item/736-careful-planning-required-to-stay-ahead-of-rising-inflation