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Could Inflation Ruin Your Retirement?

November 03, 2021

If you don’t prepare, you might be shocked by how much inflation can chip away at your retirement savings over time.

With the American economy adjusting to its “new normal,” inflation rates are rising. If you’re retired or nearing retirement, it’s critical to consider how rising inflation affects your retirement “nest egg.”

The consumer price index increased by 5.4% last year, the highest in over a decade. While not near the double-digit increases consumers saw in the 1970s, it’s still a substantial increase in your cost of living.

20 years from now, how much will your nest egg be worth?

Let’s suppose that inflation decreases from today’s levels to 3% per year and consistently maintains that rate over 20 years. Here’s how that could affect your financial well-being:

  • If you need $60,000 per year at the beginning of your retirement, you’ll need $108,366.67 per year 20 years from now to maintain the same lifestyle.
  • To put it another way, $60,000 will only have $33,220.55 in purchasing power in 20 years.

Factoring in inflation is a critical part of your retirement plan. Everything you purchase, from household items to travel, will continue to increase in cost. Meanwhile, many retirees live off low-return savings in this high-inflation economy - a recipe for financial disaster.

Don’t depend on Social Security.

According to the Senior Citizens’ League, the buying power of the average Social Security benefit has dropped by 33% in the last 20 years. Annual cost of living adjustment (COLA) increases have not kept pace with inflation, making food, housing, medical care, and other items more expensive.

The COLA for 2018 was 2.8% - about half of last year’s inflation increase - but for many years, Social Security benefit adjustments are low or non-existent. Social Security benefits saw a 0.0% increase in 2005.

Imagine if your purchasing power dropped by a third in your first 20 years of retirement. Would that put you at risk of running out of money?

How can you protect your financial well-being in retirement?

How can you determine how much retirement income you’ll need when inflation is so unpredictable? Here are some tips:

  • Identify any sources of fixed income that are unlikely to keep pace with inflation. Also, factor in interest you will earn from savings accounts or CDs - again, interest from these sources is unlikely to offset the inflation rate.
  • Determine the value of your retirement savings as of today. Then, factor in the impact of inflation over the next three decades. Keep in mind that even when inflation decreases overall, the prices of certain items and services could continue to increase in cost.
  • Determine if your current investment strategy will need to be adjusted once you enter retirement. Your strategy should allow your money to continue to grow throughout retirement years. This means assessing your risk tolerance and reallocating assets to produce optimal returns.
  • Get the help of a financial professional. Having a trusted advisor on your side can help you prepare for the realities of inflation, grow your nest egg, and help you enjoy the retirement lifestyle you’ve daydreamed about.

If you’d like to know more about how you can keep inflation from ruining your retirement, contact our team today.