2 Ways Inflation Impacts Retirement + What You Can Do

Feb 27, 2024

Take steps to keep inflation from impacting today’s savings rates and tomorrow’s retirement comfort.  

Inflation, the silent force shaping our economic landscape, often creeps into our lives unnoticed until its effects become palpable. Its impact on retirement planning, in particular, underscores its double-edged nature.  

How inflation works

At its core, inflation represents the erosion of purchasing power over time. While a dollar today may buy a certain basket of goods and services, its value diminishes as prices rise. For retirees, this creates a financial landscape where the cost of living steadily outpaces their fixed incomes. 

Current Inflation Data

The “Consumer Price Index – January 2024” release from the Bureau of Labor Statistics shares that “[t]he Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in January on a seasonally adjusted basis, after rising 0.2 percent in December… Over the last 12 months, the all items index increased 3.1 percent before seasonal adjustment.1

These inflation figures may seem nominal, but left unchecked, the ramifications on your retirement savings and post-retirement life can be profound.  

Here are two ways inflation may impact your retirement lifestyle.  

1. Current Retirement Savings

One immediate consequence of inflation is its impact on monthly retirement savings. As prices rise, individuals find themselves allocating more of their income towards essential expenses, leaving less room for discretionary savings.  

The need to maintain current living standards often takes precedence over long-term financial goals, prompting individuals to scale back on retirement contributions or dip into existing savings to meet immediate needs. 

This reduction in monthly retirement savings can have far-reaching implications for an individual’s financial security in retirement. With less capital invested, compounded growth potential diminishes, making it increasingly difficult to accumulate the nest egg necessary to sustain one’s desired standard of living post-retirement.  

Moreover, the compounding effect of inflation exacerbates this issue, amplifying the shortfall between savings and future expenses over time. 

2. Long-Term Effects

The impact of inflation doesn’t cease with the cessation of employment. In fact, its consequences become more pronounced during retirement.  

Retirees, whose income streams are typically fixed, are particularly vulnerable to inflation. While pensions and Social Security benefits provide a steady stream of income, their purchasing power erodes as the cost of goods and services escalates. Rising healthcare costs, housing expenses, and everyday essentials can deplete savings, forcing retirees to reassess their lifestyles. 

Moreover, inflation disproportionately affects retirees, as they tend to allocate a larger share of their income towards goods and services most susceptible to price increases. For example, healthcare and housing costs, which constitute a significant portion of retirees’ expenses, often outpace the general inflation rate, further exacerbating the problem.  

Despite these effects, it’s possible to navigate inflation successfully. 

How to Mitigate Inflation

In response to inflation, retirees must adopt proactive strategies to safeguard their financial well-being. Credent’s Investment Management Team views equity market participation as the best way to hedge inflation risk because, over the long term, equity returns have outpaced inflation, which cannot be said about fixed income exposure.  

Additionally, maintaining a flexible retirement spending plan that adjusts for inflationary pressures allows retirees to adapt to changing economic conditions without compromising their long-term financial security. 

Working with an Expert

Inflation’s duality, serving as a catalyst for diminished savings in the accumulation phase and a challenge during retirement, highlights the critical need for proactive financial planning.  

A financial planner’s expertise enables individuals to assess their current financial situation, establish realistic retirement goals, and devise tailored strategies to mitigate the adverse effects of inflation.  

Moreover, working with a financial planner facilitates the development of a flexible retirement spending plan that adjusts for inflation and evolving economic conditions. By incorporating inflation-adjusted projections into financial plans, individuals can ensure the longevity and sustainability of their retirement income streams, safeguarding their financial well-being throughout their golden years. 

Planning Matters

In essence, proactive engagement with a financial planner, equity market participation, and the creation of a customized financial plan are essential components of effective retirement planning in an inflationary environment. 

By recognizing inflation as a pervasive force and implementing prudent strategies to mitigate its impact, individuals can navigate the complexities of retirement planning with confidence and resilience, securing a dignified retirement for themselves and future generations. 

To learn how to protect yourself against inflation, reach out to our team at [email protected] or fill out the form below for more information.  

1. February 13, 2024, 1. 

Source: “The Double-Edged Sword of Retirement Planning.” FMeX. 2024. 13435.pdf (fmexcontent.s3.amazonaws.com) 

Schedule an appointment with an advisor in your area.