Is Inflation the Biggest Threat to Retirement

Jun 6, 2022 2 min read

It seems like everything has been increasing in cost – gas, food, paper, lumber, and many other products. Have you thought about how inflation will affect your retirement? According to Forbes, as of August 14, 2022, “the worst of year-over-year inflation rates are behind us” but the headline rate still sits at 8.5% year-over-year without really knowing when it will hit the target inflation rate. It’s crucial to do your research and look into trends or changes that can affect your retirement plan. The sooner you start planning for retirement, the better off you will be. The United States Department of Labor shares some helpful tips on how to begin investing in your retirement if you’re not sure where to start.

How Will Inflation Affect Your Retirement Income?

Understanding inflation and the effects it has on our daily lives can be difficult. You probably know the general meaning of inflation - the rising prices of goods and services, but do you really know how it comes to affect your retirement? There are many ways inflation can affect your retirement. An increase in prices can cause you to spend more money on everyday items. This could lead you to go through your savings and retirement funds much quicker than you originally budgeted for. You may not be able to control interest rates, but you can make decisions to combat its effect on your financial health. But first, how exactly is inflation affecting you?

Your Buying Power

During inflation, you will notice a rise in prices meaning your purchasing power will decrease - everything rises in cost, and you get less for your money. Because of this, you must protect yourself from the effects of inflation. Creating a savings account can help. With a savings account, you can set aside funds little by little to help you save up for any emergencies or intense inflation costs.

Social Security Benefits

To get an idea of where you are with your retirement fund, you can visit the social security website to use the retirement estimator. This may give you an idea of what to expect in the future. It won’t give you the exact amount you have from social security, but it will give you a general idea of where you’re at and if you need to begin making cost of living adjustments to reach your desired goal. 

How to Factor Inflation into Your Retirement

Whenever you’re ready to finally enjoy your retirement, make sure you don’t overindulge in the beginning. Create and evaluate your budget to factor inflation into your retirement plan. This can be seen as a hindrance, especially if you are trying to enjoy your retirement - but this isn’t as bad as it sounds. Keep an eye on what you are spending your money on. Inflation will come and go, but during that time, it’s crucial to focus on spending only what is truly necessary. Spending money on vacations or expensive items you don’t need will only set you back. Spend your money on essentials like food, rent/mortgage, utilities, etc. Housing costs should be one of your top priorities during this time. If you’re paying too much for your current place, maybe it’s time to reevaluate and downsize your home. If you want to purchase something that you don’t necessarily need immediately, it’s best to wait until prices level out or decrease.

Change Your Investment Strategy

Investing higher amounts into your 401k can also be beneficial to your retirement. When signing up for a 401k while young, it’s best to contribute a larger percentage into your 401k. You want to opt in for an “aggressive investment” to better prepare for retirement. Once you retire, you should also learn how to protect your 401k from inflation. During inflation, your 401k can decrease, but it’s important to continue investing and keep track of it. Figure out what investment strategy is best for you and learn about the interest rates and how these can affect your 401k.

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