Inflation has seemed tame or even non-existent in recent years. The threat of inflation, along with the potential for the Federal Reserve to raise interest rates to combat it, has been at least part of the recent volatility in the stock market.

The Labor Department announced that consumer prices rose 0.5 percent from December, 2017 to January, 2018. This is an increase of 2.1 percent over the their year-earlier levels.

An annual inflation rate of 2 or 3 percent over a period of years can seriously erode the purchasing power of your retirement nest egg. At 2.5 percent inflation, $1 today will be worth approximately 78 cents in 10 years, 61 cents in 20 years, and 48 cents in 30 years.

This could have a major impact on those entering retirement and those in retirement.

Managing inflation in retirement is crucial, here are some thoughts you need to consider.

Manage all of your retirement resources

Most people have multiple sources of retirement income which might include:

  • 401(k) plans
  • IRA accounts
  • Pension from a private employer
  • Pension from a governmental entity
  • Taxable investments
  • Social Security
  • Health savings accounts
  • Income from part-time employment
  • Annuities
  • Company stock options
  • Interest in a business
  • An inheritance

It is important to identify all of these financial resources and to manage them in a fashion to maximize their benefit to your retirement.

Use a conservative inflation rate for planning purposes

Since your retirement is likely to span decades, consider inflation over long time periods. Inflation is running at historically low levels, this won’t last forever. However since World War II inflation has averaged well over 3 percent.

Inflation will have a huge impact on your retirement finances, assuming today’s low inflation rate into retirement could be setting you up for disappointment down the road.

Invest to stay ahead of inflation

Your investments should be diversified among various asset classes based upon your risk tolerance, your income needs, your age, etc. That said don’t be too conservative.

While it might be tempting to shy away from risk in retirement, especially given the financial crisis of 2008-2009, for retirees their greatest retirement risk is outliving their money.

Being too conservative can easily lead to this. For most investors, a portion of their portfolio should remain invested in stocks, which have typically earned returns in excess of inflation over time.

Make good pension decisions

If you are covered by a pension plan you likely have options as to whether you want to take your benefit as a series of monthly payments over your lifetime or as a lump-sum payment. Either option can be the right choice depending upon your situation.

Most corporate pension plans do not offer cost of living increases so your monthly payments will lose value over time in real terms due to inflation. On the other hand, most public and municipal pensions do have cost of living adjustments, though there is no guarantee that future increases will keep pace with actual rate of inflation.

Taking a lump-sum distribution and rolling it over to an IRA assumes that you are comfortable managing and investing this money on your own or that you have a relationship with a financial advisor to help you do it.

A properly invested portfolio has the potential to earn enough to keep you ahead of inflation. On the flip side, it’s important to remember that investments can lose money as well.

Make sound Social Security decisions

You are eligible to begin collecting Social Security benefits at age 62. If you opt to take benefits that early your monthly payment will be permanently reduced. If you wait until your full retirement age, age 66 for those born prior to 1960, your monthly benefit will be higher.

If you are able to wait until age 70 your monthly payment amount will increase 8 percent for each year that you wait after reaching your full retirement age.

The increases are also prorated, so if you were to commence benefits at say age 65 your benefit would be proportionally higher than at age 62. Waiting longer also increases the size of your cost of living increases as these will be based upon the higher starting benefit amount.

Reduce your fixed expenses

For many entering retirement their biggest fixed expense might be their mortgage. If your mortgage payment is affordable, if you have a large nest egg and perhaps will be receiving a pension then perhaps having a mortgage in retirement will not pose a financial hardship.

At the very least make sure that your housing costs are affordable. If they are not maybe this is the time to downsize.

Prior to retirement is a good time to look at your monthly expenses. Where can you cut back without reducing your quality of life?

Do you still need all of those cable channels your kids used to watch when they lived at home? Can you adjust your cell phone plan? Do you need that second car?

The point is that the leaner your monthly expenses are entering retirement the better able you will be able to cope with the impact of inflation or other unplanned expenses that can arise.

Plan for healthcare costs

Health-care costs have tended to increase faster than overall rate of inflation. It is crucial that retirees factor in the cost of healthcare into their retirement budget.

While Medicare will help once you turn age 65, it still does not cover everything. In their latest survey, Fidelity pegs the cost of healthcare in retirement at $275,000 for a couple both aged 65, an increase of almost 5.8% from their 2016 survey.