Many factors can impact your retirement nest egg—savings rates, market fluctuations, taxes. However, one factor that's easy to overlook is the impact of inflation on your spending power during retirement.
For the last decade, inflation rates only fluctuated up to about 2%. But in December 2021, rates stretched to the
But, how does inflation affect retirement? Learning how much it can influence the power of your savings and how you can safeguard against it are key steps to planning for and protecting your retirement savings.
The inflation rate is calculated by the Bureau of Labor Statistics (BLS) each month using
Think about how the price of a cup of coffee has changed over time. You might remember paying a dollar or two for a cup of black coffee at your local cafe in the past. Today, that same cup might cost two or three times more. That's inflation at work: the same product slowly increasing in price over the years, reducing the power of a dollar.
In general, the Federal Reserve aims for the inflation rate to fluctuate at
In the Federal Reserve's December 2021 meeting, however, economists estimated the inflation rate would start decreasing in the new year, with estimates settling on a rate
Understanding the impact of inflation risk
Inflation is essentially a hidden fee eating into your retirement savings and potential gains from investments. Even small percentage changes may not seem like a big deal in the scheme of things, but they do add up. Your purchasing power in retirement may not cover the same services and care you get today. So as you're budgeting for your anticipated retirement expenses (housing, food, medical care, etc.), realize that those costs will very likely be higher in the future.
If you fail to account for inflation in your savings, you won't have as much money as you think you do when retirement comes around. This is known as inflationary risk, or the risk that inflation will undermine an investment's returns through a decline in purchasing power. To avoid this, you'll need to maintain strong savings and ensure you have enough money in retirement to keep you and your family safe and comfortable. You'll need to hedge against inflationary risk and readjust your retirement contributions and budget mindfully today for a safer tomorrow. This will help you protect your nest egg despite inflation. Online tools like a
Protecting your savings
So, how do you protect your retirement savings from inflation? Unfortunately, there is no guaranteed way to protect your retirement savings wholly and completely. Inflation will always affect your savings because rates are unpredictable. However, there are some steps you can take to help reduce the chance of inflationary risk and cope with inflation fluctuations:
Simply being mindful of inflation during retirement planning is key. Consider taking this awareness a step further and getting in touch with a financial advisor today; together, you can incorporate inflation's influence on your purchasing power as part of your overall retirement savings strategy.
Plan for adjustments.
Review your savings and prepare for inflation changes. That may include saving more than you think you need; increasing stock holdings in your portfolio; and having short-, medium-, and long-term investment strategies that adjust when inflation is high.
Review your planned income.
Many people rely on a mix of Social Security benefits and investments to pay for retirement. You may want to assess your planned income sources and look for ways you can supplement for inflation (if needed), such as renting out any real estate or jumping back into
Consider rebalancing your portfolio.
You may want to review your investments at least once a year to understand how the investments you have selected are performing. Your financial advisor can help you with rebalancing, which can help restore the mix of investments back in line with your original plan. Your financial advisors may have suggestions (and other guidance) for investments in inflation-hedged assets such as real estate, gold or other commodities.
Planning now for later
As you factor inflation into your retirement planning, risk and unexpected volatility are always possible. But having strategies to minimize their impact and protect your savings can help you feel more prepared and confident in your future. Talk with a