The Effects of Inflation on Your Retirement Planning

To enjoy your golden years to the fullest, it’s important to have a good retirement plan. As part of the planning process, it’s common for people to run into challenges. While most of those aren’t a major issue, one is. Of all the various things that can impact your retirement planning, inflation creates the biggest problem.

As you probably know, an increase in the inflation rate equates to an increase in the cost of consumer goods and services. However, you might not realize that because of inflation, the aging population pays more than younger people do. For that reason, you can anticipate inflation having a significant impact on your retirement savings unless you take action.

Retirees discovered something rather surprising. After retiring, they spent more money on goods and services compared to when they still worked. Even for those aware of this, they had no idea just how much things would cost during their retirement years.  Unfortunately, a significant amount of that is for necessities.

Now, you know inflation has a definite impact on your retirement savings. You also know that during your golden years, you’ll spend more money on basic products and services. So, it’s time to take action to protect your finances. Here are two excellent options.

  • Increase the Value of Assets – First, you want to increase the value of your assets to the point that they go beyond inflation levels. Doing this, you’ll have more money in your retirement savings, even if you still have to pay a heftier price for basic products and services. 
  • Increase Retirement Fund Power – Second, you need to increase your retirement fund power. Today, people live longer. So, you want your savings to stretch roughly 20 years after retiring.

Fighting the Inflation Challenge

Developing a plan to combat inflation as a senior is critical. After you stop working, you no longer have a way to adjust your savings to accommodate the rising costs caused by inflation. To better understand how inflation affects your retirement, consider the following.

  • Weakened Purchasing Power – Whenever the cost of products and services increases faster than what you have in your retirement savings, you won’t have the adequate funds available to buy what you need in the long term. To protect yourself, make sure your retirement income is sufficient enough to pay for standard living necessities. 
  • Savings Consumption Increases – This means inflation will consume what you set aside for retirement faster. When creating a budget for your golden years, remember to include an adjustment for an increased cost of living. That way, you can afford to purchase the items you need.

The Impact of Inflation on Your Retirement Investments

Just as with your savings, inflation is the number one variable that will impact your retirement investments. This isn’t something to play around with but rather to take seriously. So, when creating a retirement plan before you retire, remember that inflation affects both savings and investments. 

The main issue with inflation is that there’s no real way to predict what it will do. For optimal protection of your financial interests and wellness, which directly relates to your family, you need to maximize your investing power. That way, you can stay ahead of inflation rather than fall behind it.

Inflation Scenarios

If you run inflation what-if scenarios and move the inflation rate by just 1%, you might be shocked how big the impact can be. Free retirement calculators rarely let you adjust the inflation rate, but retirement software such as WealthTrace and eMoney let you do this. You can run multiple scenarios at one time and get an idea of just how much more you will need from your investments to offset the increase in inflation.

The Best Strategy

Most often, people in your situation of nearing retirement age take a more conservative approach with their savings and investments. Although that’s certainly a viable option, you might want to look at other possible solutions.

One issue with the conservative option is that if not careful, this could make planning for your retirement even more difficult. For instance, if you’re ultra-conservative with both your savings and investments, your retirement fund will struggle to grow. When that happens, any financial cushion you have for unpredictable inflation could weaken.

To keep pace with inflation, the top financial advisors recommend building a diverse portfolio for people planning for their retirement.

Utilize the Services of a Trusted Financial Expert

With so much at risk, the best thing you can do is to meet with a financial expert, someone who specializes in retirement planning. This will allow you to ask as many questions as you want. At the same time, you’ll get professional guidance to ensure your golden years are everything you imagined and more.

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