How Inflation Affects Your Firefighter Retirement

We’ve discussed at great length the kinds of risks firefighters face in retirement, with medical costs often being the primary concern. We also need to consider taxes, as that will be a consistent cost that you simply can’t avoid. However, there’s something else a bit more subtle that can have nearly an equal impact as taxes or medical costs – inflation. 

Inflation might not seem as immediate or threatening as a sudden medical expense or a tax bill, but its effects can be just as devastating over time. Understanding and planning for inflation is crucial to ensuring that your hard-earned savings maintain their value to and through retirement. 

How Inflation Affects Your Purchasing Power

How much cash do you have in your pocket? Let’s imagine $50. Well, that $50 is the strongest it will ever be. In just a couple of weeks, it’ll be worth just a bit less. And in a year, maybe a dollar less, depending on the inflation rate. In 20 years, though? That same $50 bill would only be worth about $27, assuming a 3% historical inflation rate. 

Now, apply that same inflation rate across your entire cash savings. If your savings aren’t at least keeping pace with inflation, you’re going to feel its pinch eventually. Maybe not in a year, but in 20 or 30 years, you’ll realize you can purchase only a fraction of what you can buy now. That pinch can eventually become a squeeze on your finances, which you’ll find difficult to escape from.

Inflation Calculator: See How Inflation Affects Your Savings

For Visual and Educational Purposes Only – Your Results Will Vary

Imagine going to the store and only being able to buy half of what you originally could on the same salary twenty years ago. That’s right, it only takes twenty years for your savings to lose half their purchasing power, and at the same time, you’ll be paying taxes and potentially expenses that often outpace inflation, such as medical expenses and tuition. 

How Inflation Affects Your Firefighter Pension 

When you retire as a firefighter, you might receive a fixed monthly pension payment for the rest of your life. This fixed amount provides you with the peace of mind that those who have to rely on a combination of personal retirement savings and Social Security might not have. 

However, this fixed amount could lose significant value over time due to inflation – even more so without a Cost of Living Adjustment (COLA). A typical COLA increase could be 2% to 3% per year. Historical inflation rates are about 3% a year, so as long as you get at least that, you’ll be more or less fine – if inflation doesn’t go rampant. Anything less than 3% will begin to eat away at your purchasing power.  

Also, there is a very real chance of not receiving a COLA at all, even if your state is contractually obligated to do so. 

New Jersey suspended COLAs for public employees, including firefighters, until the pension funds reach an 80% funded status​​​​ – all the way back in 2011, and COLA is still frozen. So, a firefighter who retired in 2011 has seen nearly a 25% loss in purchasing power due to inflation over this period and would need about $3,311 a month to maintain their original lifestyle. Even if COLA is reinstated tomorrow, the damage is done. While your state may not have funding issues now, it may in the future. 

Alternatively, your state may not offer COLA increases at all, which means it’s high time to figure out how to secure your purchasing power in retirement. 

How Inflation Affects Your Investment Portfolio

There’s no guarantee that your pension will keep up with inflation. However, many investment strategies have shown that they can often (though not always) outpace inflation. So, one way to bolster your savings could be to purchase assets that have the potential to grow over time, ideally above and beyond the historical inflation rate. 

Keep in mind that no investment is guaranteed, and investing involves the risk of complete loss of capital. 

With that being said, let’s see how inflation could affect your portfolio if you were to invest. 

Let’s say you have an asset that has a 10% rate of return for the year. That’s a pretty good return, but it’s not the end of the story. To get your real return, you have to subtract inflation from it. So if inflation was 5%, you only had a 5% return. 

Still, 5% is better than 0%. 

But what about those years of negative returns? In those cases, inflation only serves to worsen your already declining investments. 

Let’s use an example to illustrate this double impact:

Investment Performance vs. 3% Inflation Impact

For Visual and Educational Purposes Only – Your Results Will Vary

You have $100,000 invested and experience a 5% loss, so you have $95,000 at the end of the year. However, inflation was 3%, so your purchasing power is actually only $92,233. Fast forward eight years, after years of ups and downs, your portfolio’s value is worth around $127,000. However, your purchasing power still remains at about $100,000. So, while your returns were pretty standard, you actually just kept pace with inflation! 

In Conclusion

As a firefighter, you know that life is full of uncertainties, and inflation is definitely one of those. While America generally has stable inflation rates compared to other countries, we do occasionally experience periods of high and uncontrollable inflation that can wreak havoc on your retirement plan. So, just like we need to plan for other retirement uncertainties like taxes, medical expenses, and emergencies, we also need to plan for inflation – every step of the way. 

If you’re worried about inflation derailing your retirement plans, we’d be happy to review your options. While we may not be able to stop inflation in its tracks, we can help you explore alternative strategies that could mitigate the impact of inflation to help you secure a successful retirement.  

If you’d like to consult with a financial professional that understands the needs of firefighters, click the button below!

The information contained in this article is for educational purposes only, this is not intended as tax, legal, or financial advice. One should always consult with the tax, legal, and financial professionals of their choosing regarding their specific situation.

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