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The Retirement Risk You Didn't Realize
By David Chazin
After years of hard work at Chevron, you’re probably looking forward to a comfortable retirement. After all, it’s nice to know those evenings you devoted to completing your work will pay off with relaxing vacations and more time for golf, or any other hobby you have.
Given typical retirement ages for Chevron employees (late 50’s and early 60’s) and today’s life expectancies (into your 80’s for both men and women), you’re also probably looking at a LONG retirement. And as a result, there is a risk to your retirement that you probably haven’t fully accounted for: INFLATION.
Everybody knows about inflation in the general sense, but because its impact is generally slow and steady, most people don’t realize just how large that impact is. You may laugh when you hear your parents (or grandparents) say that soda used to cost a nickel, but in 30 years, you’ll probably be complaining that soda used to cost only a dollar.
Those increases of a few cents (or a few dollars) each year can really add up. Even a relatively low rate of inflation during your Chevron years can significantly reduce how far your money will go once you retire. That’s because, as prices go up, the money you’ve saved for retirement will buy less. If your savings fall behind inflation, it could have a huge impact on your standard of living during retirement.
Let’s look at a simplified example of how dramatically inflation can affect your ability to maintain your standard of living once you retire from Chevron. Let’s assume your salary is $100,000 today and you receive raises every year that match the inflation rate. If inflation is 4% per year (which is what I typically model), your salary would be $162,170 in just 12 years, which sounds nice at first glance.
However, one rule of thumb is that you will need 80% of your pre-retirement income to live on once you leave Chevron, so if you retired after those 12 years, you would need nearly $130,000 for just your first year of retirement. But inflation during retirement will continue to increase the amount of income you’ll need each year. If inflation averages the same 4%, you’d need about $285,000 of income after 20 years of retirement to maintain the same standard of living, and there’s a good chance you’ll live even longer than that.
That said, you need to make sure you’re properly positioned to deal with the potential impact of inflation. If your investment returns aren’t able to stay ahead of inflation, your purchasing power will slowly erode.
Chevron offers its employees two major retirement savings tools – the ESIP and the pension (CRP). One strategy you can use in an effort to beat inflation is to simply increase the amount you’re putting into your ESIP each pay period; and if you’re not putting in enough money to take full advantage of Chevron’s employer match, you should start doing so immediately.
Another way is to invest your money intelligently. Stocks have the greatest potential based on historical performance to outpace the inflation rate, but stock investing involves a high degree of risk. Stock prices fluctuate and you may lose money, which is especially risky once you retire and need to draw income from your accounts.
The good news is there are vehicles that are designed to specifically protect against inflation, such as TIPS. There are other vehicles that are designed to generate retirement income for you that rises based on inflation rates. Nobody knows exactly what the future increases in the cost of living will be, but this way you are as prepared as possible. Of course, the best way to explore these areas is to talk to a comprehensive financial planner, who can help you determine if and what portion these should be in your portfolio.
I’d be happy to sit down with you to discuss the ways in which you can properly account for and protect against inflation. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.