Inflation and IPERS
Inflation is in the news these days. You are probably feeling it when you buy groceries or do other shopping.
As a financial planner for educators in Iowa, my mind automatically goes to IPERS when I hear the word inflation. For IPERS is a wonderful retirement benefit, more so than most teachers truly realize, but it does have the “inflation problem.”
Because IPERS does not have a cost of living adjustment (like Social Security does), inflation is the number one enemy to an IPERS benefit after checks start to arrive. Whatever dollar amount your first payment is, that will be your payment going forward each and every month. It won’t go up. It won’t go down.
The dollar amount won’t go down. But, as prices increase, what that monthly check will actually buy will definitely decrease. You will likely lose purchasing power each and every year.
Check out this table comparing the long-term historical rate of inflation (3%) to what the economy is experiencing today (around 7%) and its purchasing power impact on an IPERS benefit of $3,500/month. This would be how much you can actually buy in today’s dollars.
I in no way think that prices will continue to rise at the 7% clip that we are currently experiencing; not even close to it. But, you can see the risk of having your entire retirement built around IPERS, even at the historical rate of inflation.
It speaks to the importance of saving additional dollars in outside retirement accounts like Roth IRAs or 403(b)s. Those are the accounts that a retiree will rely on to fill in this “inflation gap” caused by prices rising over time. You need additional savings just to stay even with your standard of living.
So if you haven’t started saving in other types of accounts, now is as good a time as ever. Prepare now, and this won’t have major negative impact down the road.
If you are currently working and paying into IPERS, this current higher inflation episode doesn’t have a major effect on your long-term retirement situation as long as your wages keep up with those prices, other than the impact inflation has on the overall economy. It is really when you retire and start IPERS benefits when this is a major issue.
So it is your former teaching colleagues who have started their monthly benefit in the past who are paying the heavy price these days. They, unfortunately, can’t really do much about it if they didn’t save during their working years. Alternatively, you still can prepare for those future inflation years in your own retirement. Something to consider.
