You feel like you’re on solid ground. You’ve done the work and feel prepared for each phase of your retirement – go-go, slow-go, and no-go. Your investments are balanced, your 401(k) has seen regular contributions for the majority of your career. Retirement is just a few short years away, and you’ve accounted for everything. But, what about inflation?

Let’s say your plan allows for $50,000 of yearly income in retirement. You’ll be wonderfully prepared early on, but consider this: Over the years, the purchasing power of your dollars will erode, meaning you need more money in the future to buy the same goods and services that you did in the past. What’s the quantifiable impact of inflation on your retirement savings?

The effect is more easily understood when we look at it in terms of your yearly income and the historical average rates of inflation. In the U.S., the average rate is 3.2%, and you’ve planned for a yearly income of $50,000 in order to maintain your pre-retirement lifestyle. Ten years into your retirement, you will need $67,000 to purchase the same amount of goods and services as you did with your $50,000 income just ten years earlier. Twenty years into retirement? You’ll need $90,000. And after Thirty years? You will need $121,000. When we unpack these numbers, you can see how crucial accounting for inflation can be to your long-term plan.

The above breakdown is just how this increase effects the money supply, but we also need to be mindful about how inflation effects goods and services. There are certain markets in which increases can have an outsized impact. The most important of these to your retirement plan is healthcare. While the long-term national average rate of inflation for the money supply is 3.2%, the long-term average for healthcare is 5.39% – that’s a significant difference, and one that needs to be factored in to your retirement plan. Healthcare is one of retirement’s biggest costs, and one that can almost instantly derail even the sturdiest retirement plans.

So, how can we protect against inflation? 

Delay Retirement

The later in life you take retirement, the less time there will be for inflation to work against your savings. Additionally, salaries and wages adjust more quickly to cost of living and account for inflation well. Instead of inflation eroding your savings in early retirement, your final working years will be spent earning an income that is already adjusted for inflation. This is the most reliable way to stave off inflation and correct any inadequacies of your retirement plan.

Delay Social Security Benefits

If you can wait until you turn 70 – the maximum age – you should strongly consider it. Social Security benefits have built-in adjustments for cost of living, based on inflation rates. The payments you receive from your benefits will be inclusive of inflation’s impact and the purchasing power of those dollars will be more commensurate with the present market.

Home Equity

Historically, real estate costs adjust quickly and accurately with rising rates. If downsizing is the right decision for your plan and family, then selling your home, or capitalizing on your home’s equity, might provide some essential protection against the erosive effects of inflation.

Rethink Investment Strategies

There are investment options that could provide a buffer from increases that might provide some peace of mind. Some annuities give you the option to purchase inflation protection for up to a 5% rate, which would cover the long-term national average. I-Bonds are safer, income oriented investments that earn interest based on a combination of a fixed rate and inflation rates – updated twice per year. Conversely, depending upon your situation, you may want to consider a more aggressive stock investment strategy. It’s true that stocks are riskier investments, but historically, the dividends paid beat inflation.

There’s no doubt inflation is a difficult reality for which to account. It’s also inevitable, so there is a certain predictability to it, which means we can make plans to prepare for its erosive effects on our dollars’ purchasing power. These kinds of granular considerations have made me an effective financial planner and allowed me to help people achieve financial peace of mind. The cloud of financial uncertainty is the greatest threat to a successful retirement plan and financial future. If you’re starting to think seriously about retirement and need some certainty about your situation, we need to begin with where you are and understand your current saving habits. Taking my Retirement Quiz is a perfect first step. 

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