Back to top

What Do Stubborn Inflation Rates Mean for Your Retirement?

Imagine being retired with years of hard work behind you; finally enjoying the freedom to travel, enjoy your favorite hobbies, spend time with family, or simply relax.

Now, picture those dreams being slowly eroded by rising prices, making every dollar you saved worth less than before. This is the harsh reality many retirees face today as high inflation rates continue to plague the U.S. economy.

The most common retirement fear — outliving one's savings — is becoming more pressing than ever. As inflation steadily holds firm, the financial security that retirees worked so hard to build is under serious threat, forcing many to confront the possibility that their savings may not last through their retirement years.

In 2022, inflation skyrocketed to levels not seen since the early 1980s, peaking at over 9%. More than a year later, things have improved some, but inflation is still holding steady around 3.5%, stubbornly high compared to pre-pandemic levels that were mostly below 2.5%. For retirees living on fixed incomes, this spike is more than just a number — it's a threat to their financial security and peace of mind. As the cost of living rises, many find themselves struggling to stretch their savings far enough to cover their needs.

Last year, retiree confidence in their ability to live comfortably during retirement plummeted, with the 2023 Retirement Confidence Survey recording its biggest decline since the global financial crisis of 2008.

Craig Copeland, director of wealth benefits research for the Employee Benefit Research Institute (EBRI), explains that this drop in confidence is largely due to inflation. Among retirees, 42% said the high cost of living contributed to their loss of confidence and 25% cited a lack of savings, which is a direct result of high inflation (when things cost more, it leaves less money for savings).

Nearly 60% of retirees report that their retirement account balances decreased over the past 12 months, and two-thirds worry that the increasing cost of living will make it harder for them to save money. In addition, 58% are concerned they will have to make substantial cuts to their spending.

The poor performance of the stock and bond markets also had an impact on retirement balances. Before the COVID-19 pandemic, people could take their required minimum distributions and still increase their remaining balances because of the double-digit returns in the stock market. That wasn’t the case over the past year, and we'll have to see if it becomes a trend.

How You Can Protect Your Retirement From Inflation

Given the persistent nature of inflation and its direct impact on how far your dollar will take you, people who are already retired should consider a few key strategies to safeguard their financial security.

1. Delay Claiming Social Security Benefits

One effective strategy is to delay claiming Social Security benefits. While retirees can begin collecting benefits at age 62, waiting until age 70 can increase their lifetime monthly benefits by about 77% — if you have enough savings and other income streams to cover the gap. This approach can help offset the impact of inflation by providing a higher base income in the later years of retirement.

2. Diversify Investments and Rebalance Regularly

Investing for growth and regularly rebalancing your investment portfolio is crucial. One result of high inflation has been higher interest rates and higher yields, which means bonds are suddenly a more attractive income generator. Certain equities can also offer growth to outpace inflation over the long term. Retirees should consider maintaining a diversified portfolio that includes stocks, bonds, and other assets to protect against inflation and market volatility.

3. Consider Annuities

Annuities can provide a consistent stream of fixed income, which can be valuable in managing living expenses in a high-inflation environment. While annuities may not be the right choice for every retiree, they can offer peace of mind by guaranteeing a portion of income for life (or a specified period). Annuities can be very complicated investment vehicles, and you should consult with a financial advisor to understand the different types and their benefits.

4. Prepare for Healthcare Costs

Planning for future healthcare costs is essential. Retirees should consider contributing to a Health Savings Account (HSA) if they have a high-deductible health plan. HSAs offer triple tax benefits: pre-tax contributions, tax-free growth, and tax-free withdrawals for certain qualified medical expenses. In addition to having an HSA, retirees may want to explore life insurance policies with long-term care benefit riders, which are meant to cover some healthcare costs while providing a death benefit to beneficiaries.

5. Maintain a Cash Cushion

Having a cash cushion to cover one or two years' worth of expenses can help manage short-term financial needs without having to sell investments at a loss. This approach can provide stability during periods of high inflation or market downturns, ensuring that retirees have access to funds for immediate expenses without jeopardizing their long-term financial security.

6. Regularly Review and Adjust Financial Plans

Regularly reviewing and adjusting financial plans to account for changes in inflation rates and personal circumstances is critical. Retirees should work with financial advisors to update their budgets, reassess their investment strategies, and make necessary adjustments to ensure their financial plans remain robust and aligned with their goals.

Unfortunately, you can’t do anything to escape inflation or prevent it from affecting your retirement savings. But by adopting some proactive strategies, you can still mitigate its overall impact. Discussing these options with a financial advisor and tax professional can help you maintain financial security and afford the life you want in retirement, even in the face of persistent inflation.