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What Effect Could Inflation Have On Your Retirement Plans? Thumbnail

What Effect Could Inflation Have On Your Retirement Plans?

Inflation often has a detrimental effect on the savings of retirees. They have saved and saved for many years but their buying power decreases as the costs of goods rises. Because of this, it is a challenge for some retirees to maintain their savings and lifestyle.

Thankfully, there are ways for retirees to adjust for inflation and protect their valuable retirement. Read on to learn some ways inflation affects retirement and how you can best prepare. 

What is the CPI?

CPI is the Consumer Price Index. This is how inflation is calculated. The CPI calculates inflation across major categories then determines a yearly inflation rate expressed as a percentage.1 

Inflation rate is roughly 3% on average in the U.S.2 Looking at both the percentage expressed by the CPI and the U.S. average inflation rate can be helpful in understanding inflation across multiple markets. It is important to realize, however, that the real impact of inflation always depends on the individual. 

As an example, people often assume that a retiree would need to withdraw an additional 3% annually from their savings to adjust for inflation. This isn’t the whole picture, though. Instead, this retiree should consider the specific ways they are affected by inflation. 

Considering Specific Costs

We are each affected differently by inflation. The higher costs of gas would have a larger impact on a retiree that spends a lot of time driving than someone without a vehicle. Renters may see an increase in their rent but that won’t affect a retiree who owns their home. 

Retirement leads to lifestyle changes that cause inflation to affect retirees differently. A good way to measure this difference is by using the Consumer Price Index for the Elderly (CPI-E). The CPI-E shows inflation rates for households where individuals ages 62 and above reside.3 

While helpful, this is still a generalization, even though it is of a specific population. The very best way for retirees to determine the cost of inflation is to examine their personal expenses and lifestyle and make adjustments where they are needed. 

Managing the Effects of Inflation

Keeping the information above in mind, read on to learn some ways you can offset inflation during retirement. 

Social Security

The Social Security Administration provides the Cost-of-Living-Adjustment (COLA) to help retirees offset some of the effects of inflation. They do this by raising Social Security benefits.4 During retirement, Social Security is often an important income source. 

Investments that Adjust with Inflation

There are some investments that can adjust with inflation. However, all investments come with risk. This is something that should be considered during retirement. You should always consult with your financial advisor before making any investment decisions. 

Lifestyle Changes

Take a hard look at your retirement goals and your overall lifestyle. Take note of where you can cut back to save on the cost of inflation. This doesn’t mean you should give up on your retirement goals. Rather, consider what can be adjusted to help you achieve your retirement goals while maintaining your savings. 

This is not a comprehensive list of all the ways to shield your retirement savings against the effects of inflation. Instead, it is intended to demonstrate to you some of the options available. To get a better understanding of how inflation will affect you, consult with your trusted financial advisor. They will guide you towards the best way to protect your retirement savings from inflation.

  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/