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How to offset inflation's impact on your retirement savings

May 17, 2024
Last revised: June 6, 2024

Worried your retirement investments and accounts won't keep up with inflation? Get tips—including steps on how to hedge your investments—to help offset its effects.
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Rob And Julia Campbell/Rob And Julia Campbell / Stocksy United

Key takeaways

  1. Inflation risk, or purchasing power risk, is the potential for inflation to reduce an investment's value by outpacing its returns.
  2. Investing in assets that have the potential to outpace inflation can be a part of your long-term investing strategy.
  3. Building a stronger financial foundation now, including a budget and emergency fund, can help you prepare for future inflation.

Many factors can impact your retirement nest egg—interest rates, market fluctuations, taxes. One factor that's easy to overlook is the potential threat of inflation, which can erode your spending power in retirement if not managed effectively. So, how does inflation affect retirement?

Historically, the Federal Reserve expects a slight rise in inflation each year and aims to keep the rate around 2%. While inflation has calmed from 2021 and 2022 after reaching record highs with a 9.1% spike in June 2022, you're likely still seeing it reflected in prices today, from housing costs to groceries.

Unexpected increases and surges highlight the need to account for inflation in your future finances. The danger of this pitfall is highlighted in a Consumer Financial Outlook Survey by Thrivent, which found that 63% of Americans feel inflation is pushing them off track financially.*

Here's a deeper look at how inflation protects your retirement savings and how you can plan for and feel more confident about protecting them in the future.

Defining inflation

The Bureau of Labor Statistics (BLS) calculates the monthly inflation rate using fluctuations in the Consumer Price Index (CPI). The CPI measures the price of a basket of everyday goods and services, including food, gas, clothing and health care. The percentage change in the CPI over time determines the inflation rate.

Think about how the price of a cup of coffee has changed. You might remember paying less than a couple dollars in the past for a tall, fresh brew. Today, that same cup might cost $3–$4. That's inflation in action—a gradual price increase over time that reduces your money's purchasing power.

When determining what inflation rate to factor into retirement planning, a common default rate is 2% annually, which is what the Federal Reserve aims for. But this may not accurately reflect the actual inflation rate. For example, in early 2024, data from the BLS put the inflation rate at 3.5%.

Understanding the impact of inflation risk

Inflation can act like a hidden fee, slowly eroding the value of your retirement savings. Even small percentages add up over time, meaning the money you've saved may not buy as much when you need to spend it. This is known as inflation risk.

To hedge against it, as you budget for your anticipated retirement expenses (housing, food, medical care, etc.), it's important to realize those costs will likely rise. To compensate, you may need to dial up your retirement contributions. This way, you can feel more confident that inflation won't derail your finances.

7 ways to help protect your retirement savings from inflation

While there isn't a foolproof way to safeguard your lifetime savings against unpredictable inflation rates, you can take the following steps to help strategically reduce inflation risk and build resilience within your portfolio.

1. Establish a budget

A detailed budget can help you navigate inflation's impact on short-term needs. It provides a clear picture of your income and expenses, helping you prioritize. By carefully tracking spending and separating fixed costs (like housing) from variable expenses (like dining out), you can identify areas where you may have spending flexibility. A budget can also help uncover areas where you can cut back if needed, freeing up more funds for savings and investments. Building a stronger financial foundation now can help you prepare for future inflation.

2. Build your emergency fund

Inflation can bring unexpected expenses. A solid emergency fund can provide a buffer, preventing you from needing to dip into your long-term investments and potentially disrupting their growth potential. This allows for compound interest to work consistently, steadily building wealth that can help offset the effects of inflation over time. Having access to an emergency fund can help provide added financial stability in times of uncertainty.

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Best practices for your rainy day fund
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3. Diversify & invest for inflation-beating growth

Relying on traditional savings accounts may mean your money loses value over time due to inflation. Investing in assets that have the potential to outpace it can be a part of your long-term investing strategy.

Consider some of these options:

  • Real estate. Property values and rent can appreciate over time, so investing in real estate can provide some inflation protection. You can also explore real estate investment trusts (REITs) for exposure to real estate without needing to purchase a home or rental property.
  • Commodities. Some commodities, such as gold, tend to increase in price during periods of higher-than-expected inflation.

There's something else to think about as you review your investment strategies. If you have an IRA or an employer-sponsored retirement account like a 401(k), keep contributing to it regularly—ideally with a fixed percentage of your income. Reducing what you put in, even for a short time, can decrease your growth potential, which can have a lasting impact on what you accumulate for retirement. Contributing a set percentage of your income rather than a fixed dollar amount, particularly if you get regular raises, can give your retirement savings some built-in inflation protection.

4. Consider an inflation-adjusted annuity

While saving is key, exploring ways to increase your retirement income can improve your overall financial security so you don't have to worry about running out of money. One possible way to do that is through an annuity.

An annuity is a financial vehicle that offers a guaranteed income stream in retirement that supplements your savings. An inflation-adjusted annuity can help protect against inflation's impact on retirement income. Having guaranteed income from an annuity may help you feel more empowered to invest in other assets with higher growth potential as part of your retirement strategy.

5. Maximize the timing of your Social Security benefits

If you’re nearing retirement, it may be tempting to claim Social Security benefits as soon as you're eligible. But consider the financial advantages of waiting. If you claim as early as age 62, you'll only receive 70% of your full retirement benefit. Delaying until age 70, however, means your benefit may be 124% of your full benefit.

Factoring in this timing can give you a larger potential income for future cost of living adjustments (COLAs) linked to inflation. Delaying your Social Security benefits may help combat some of inflation's dent on future purchasing power throughout your retirement.

Keep in mind that this approach means it's even more important to build other savings for retirement income so you're able to hold off on Social Security benefits.

6. Plan for adjustments to your investment plan

Review your savings and prepare for inflation changes. The Federal Reserve often adjusts interest rates to combat inflation, so rising interest rates can mean higher returns on savings accounts but make borrowing more expensive.

To compensate for inflation, steps may include:

  • Saving more than you think you need to counter inflation.
  • Minimize or pay off debt that carries interest charges.
  • Increasing stock holdings in your portfolio.
  • Having short-, medium- and long-term investment strategies that you can tweak when inflation is high.

Approaching your plans with flexibility can also help reduce other risks like sequence of returns risk and longevity risk, both of which can significantly impact your retirement savings.

If you find the investments don't align with your needs, goals and risk tolerance, you may need to adjust or rebalance your portfolio.

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7. Get help from a financial advisor

Inflation should be a key factor in your retirement planning, so it's important to keep it top of mind as you go through the process. A financial advisor can help you review and evaluate the potential impact of inflation on your future purchasing power and adjust your savings strategy accordingly. They can also provide tailored advice to help you build a more inflation-resistant portfolio.

*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.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

Guarantees based on the financial strength and claims paying ability of Thrivent.

Investing involves risk, including the possible loss of principal.