Today, we’re going to answer the question many people ask themselves: How does inflation impact my pre-retirement savings goals or my current retirement plan? More importantly, when inflation skyrockets, how can I protect my retirement?
But, before we can answer those questions, we need to talk about the nuts and bolts of inflation. This relentless force called inflation can erode the purchasing power of your retirement savings, having profound implications for you. Without properly understanding inflation and its impact, you could find yourself in financial insecurity and living a lower standard of living than you expected.
What is Inflation?
Basically, inflation is the rising rate of prices for goods and services. As prices rise, your purchasing power, i.e. the ability to buy more with your money, diminishes.
Various factors can drive or cause inflation: supply and demand, rising costs of production, monetary and government policies, and economic events. Historically, inflation is marked by periods of increase, decrease, or relative stability.
We all know and have experienced inflation and its effects on the cost of living, particularly over the last couple of years. But inflation is also an indicator of economic health. Moderate inflation is a sign of a healthy and growing economy, but when it exceeds target levels, your dollar buys fewer goods and services. When this happens, it’s an indication that the economy is not as healthy as it once was and it’s time to take action.
What does this mean for you as a pre-retiree or someone already in your golden years? It means you may have to stretch your savings and fixed incomes simply to cover your needs.
Inflation's Impact on Pre-Retirement Planning
When inflation rises, those in their pre-retirement years must reassess their savings and make a shift towards more inflation-resistant investment strategies. You need to be able to make informed decisions regarding your financial future, especially in pre-retirement planning.
In this stage, your focus is in accumulating enough wealth to achieve your financial goals. But, you shouldn’t be just focusing on the numbers that cover necessities today. Rather, you need to have a strategy that accounts for your lifestyle choices and, most importantly, future economic impacts such as inflation.
You need to be asking yourself questions such as:
- What is my risk tolerance? We know that safety, guarantees, and consistency is the goal for pre-retirement planning, but risk tolerance looks different for each person.
- How much of a cash cushion should I have? You need enough in cash and in the reserves to be able to get through hard economic times such as inflation as well as to account for other unknowns in life.
- What is my preferred income that aligns with my lifestyle, as well as the income I absolutely need to live?
Then you need to ask yourself, “How do I invest my money the best way to account for inflation and other life events?” Once in retirement, you’ll be shifting your focus from accumulation to the income phase, where you can use those assets to enjoy your chosen lifestyle in retirement.
Inflation and Retirement Income
Inflation plays a critical role in using assets. It can diminish the purchasing power of your fixed-income sources such as pensions, Social Security benefits, annuities, bonds or CDs. Fixed-income sources such as these cannot keep up with inflation and it erodes the value of accumulated savings.
What seemed like a substantial nest egg and reliable source of income, quickly becomes problematic. You may find yourself unable to cover basic expenses or keep up with the rising cost of living. More importantly, you may have difficulty affording healthcare. Healthcare costs tend to rise faster than the rate of inflation, so accounting for this is an integral part of your retirement planning.
Because of inflation’s negative affects on fixed-income sources, it’s imperative to not rely on one income stream. As part of a smart retirement plan, you must consider other income streams and make your retirement savings inflation-proof.
How do you do that? There’s a few key strategies to consider in protecting your retirement against inflation.
Inflation-Proofing Your Retirement Savings
When facing inflation, you need to reevaluate your investment strategies as a pre-retiree and also your withdrawal strategies when in your golden years.
For pre-retirees, such inflation-proofing strategies include:
- Increasing your savings rates during times of high inflation;
- Considering delaying your retirement to save more;
- Diversifying your portfolio with a mix of assets that help counteract inflation’s effects, such as stocks and real estate.
For retirees, you can get ahead of inflation by:
- Establishing withdrawal strategies that are more conservative than the 4% rule, which may not be sufficient during times of high inflation;
- Considering part-time work or other income sources to counteract some of the effects of inflation;
- Making temporary lifestyle adjustments to extend your retirement funds.
For both pre-retirees and retirees, it’s important to continually educate yourself, stay informed about economic trends, and seek professional advice. Regularly reviewing and adjusting your investment portfolio will also do much to counteract any negative economic conditions. Consulting with a financial advisor during your pre-retirement years and into your golden years will help you secure financial stability, even during times of high inflation.
At Lohr & Company, we understand the concerns you face during your pre-retirement years and in retirement. We can help you navigate the uncertainties of life to maintain financial stability, even during times of high inflation. Contact us today.
