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How does inflation affect retirement savings?

Woman on laptop drinking coffee.
Rob And Julia Campbell/Rob And Julia Campbell / Stocksy United

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 June 2022, rates stretched to the highest they've been in the last 40 years. While these circumstances are hopefully temporary and singular, accounting for inflation in your future finances is still wise.

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.

Defining inflation

The inflation rate is calculated by the Bureau of Labor Statistics (BLS) each month using fluctuations in the Consumer Price Index (CPI). The CPI is used to measure the price of a basket of consumer goods and services across industries including food, gasoline and clothing – it even assesses healthcare costs like Medicare premiums and prescription drugs. The percentage change in the CPI from the prior period is the inflation rate.

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 café 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 no more than a 2% difference year over year, which is considered healthy for the economy. However, a variety of factors—including residual impacts from the continuing COVID-19 pandemic, increased consumer demand, and supply chain issues—have combined to see inflation rise to some of its highest levels in decades. In June 2022, the year-over-year unadjusted inflation rate reached 9.1%, the largest increase since 1982.

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.

According to a 2022 Consumer Financial Outlook Survey* by Thrivent, Americans feel that inflation is pushing them off track financially, getting in the way of their ability to save. And 63% noted that inflation is pushing them off track financially. This is leading many Americans to wish they had more breathing room in their finances.

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 retirement income planning calculator can help you get ahead of inflation risk and ensure your savings today can help you achieve your future goals.

60% of people surveyed noted inflation is getting in the way of saving.
2022 Thrivent Consumer Financial Outlook Survey

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:

Be prepared.

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 part-time or freelance work.

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 financial advisor about how to help shield your retirement income plan from the affects of inflation.

*Methodology: This general population research was conducted in partnership with data intelligence company Morning Consult and polled 2,221 adults across the country between May 9 and 17, 2022. The interviews were conducted online, and the data were weighted to approximate a target sample of nationally representative adults based on age, gender, ethnicity, income, geography. Results from the full survey have a margin of error of +/- 2 percentage points.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.