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Could Inflation Affect Your Retirement Plans? Thumbnail

Could Inflation Affect Your Retirement Plans?

When planning for retirement, it is important to keep in mind the detrimental effects that inflation can have on your retirement savings. As the cost of goods continues to rise, the inherent value and practical buying power of many retirement accounts continues to diminish. For some retirees who are already dependent on the funds that they have prepared according to their retirement plan, this can make it challenging to maintain their savings and lifestyle.

Fortunately, there’s no reason to lose hope. There are several different methods available to retirees to adjust for inflation and protect the value of your retirement funds. It is important to understand some of the ways that inflation can affect retirement and some of the options you can discuss with your financial advisor as your next step.

How Is Yearly Inflation Calculated?

As a basic definition, inflation is calculated using the Consumer Price Index (CPI). The CPI is a percentage used to represent a yearly inflation rate, determined by calculations across several major categories.1

On average, the U.S. experiences an inflation rate of roughly three percent.2 This and the CPI-calculated percentage are useful tools for expressing inflation and its effects across multiple markets, but it is crucial to also understand that the calculations and averaging used to arrive at those numbers means that they are a generalization and not particularly useful on the individual level. Unique financial circumstances and other life factors will influence the real impact of inflation on your life.

For example, the above definitions might lead you to assume that a retiree could withdraw an additional three percent from their savings each year in order to adjust for inflation. But this isn’t the whole picture or a blanket solution. Instead, this retiree should consider the specific ways that inflation affects them.

Considering Individual Costs

Retirement considerations aside, inflation affects each of us differently depending on our life circumstances, regardless of age. For example, the rising cost of gasoline would affect someone that drives long distances more than someone who doesn't own a vehicle.

In a similar way, retirement affects an individual's lifestyle drastically, resulting in drastically different effects of inflation.

One of the better ways to measure this difference is through the Consumer Price Index for the Elderly (CPI-E), which specifically expresses inflation rates for households with individuals age 62 and above.3

Even though the CPI-E represents a specific population, it is still a generalization, which is an important distinction to make. Overall, the best way to determine the cost of inflation is to examine your personal lifestyle and make adjustments.

Managing the Effects of Inflation

To summarize, although there is a definition of inflation and methods to calculate it on a broad level, understanding inflation requires a conversation with your financial advisor and a full understanding of your lifestyle and financial circumstances.

However, there are ways to offset the effects of inflation during retirement.

Social Security

The Social Security Administration provides the Cost-of-Living-Adjustment (COLA) to offset some of the effects of inflation by increasing Social Security benefits.4 This can be an important source of income during retirement. 

However, the COLA is also based on the CPI-W, which considers those who are earning wages, meaning some individuals may not be able to rely on adjustments from Social Security to make up for all cost increases.4


Investments that Adjust with Inflation

Certain investments can adjust with inflation. However, any investment comes with an inherent risk, something that should always be considered in regards to retirement plans.

Be sure to consult with your financial advisor before making any investment decisions.

A Change in Lifestyle

Consider your major goals and plans for retirement. Are there places you can cut back in order to save on the cost of inflation? This does not necessarily mean giving up on your retirement goals; rather, it means examining the lifestyle you are expecting for retirement and deciding for yourself what can be adjusted to help you reach that while maintaining your savings.

While important factors to consider, these are by no means the only options for protecting your retirement funds from inflation. Instead, use these as conversation starters with your financial professional and work together to understand how inflation will affect you and create a game plan to protect your savings now and in the future.

  1. https://www.bls.gov/cpi/
  2. https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp
  3. https://www.bls.gov/cpi/research-series/r-cpi-e-home.htm
  4. https://www.ssa.gov/cola/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.