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How to Retire Amid High Inflation

There are many things to consider when you plan for your retirement. Your goals, income, health, age, life expectancy, family’s needs, number of dependents, debt, and more can shape your retirement plan. While all of these things are important and often accounted for, there is one more vital aspect that is usually ignored. Inflation is one of the primary factors that can impact your retirement plan. However, many times, it is not paid much attention to.

Financial planning is about the future. It helps you plan for your future financial needs, such as retirement, healthcare, long-term care, and more. However, it is hard to undermine the fact that the future is unpredictable. The costs of prices are continually on the rise, and the value of the money is depreciating. Housing costs in the country have increased by 48.55% in the last ten years. The average annual rise in health spending was recorded at 4.2% from 2010 to 2019, and the COVID-19 pandemic has only worsened the situation. Gasoline was priced at $0.57 per liter in 1991 but costs $1.30 per liter as of June 2022. Beef prices have increased by 11% since 2020.

Inflation is unavoidable and cannot be sidestepped. The inflation rate was 8.5% for 12 months ending up until July 2022. Such a high inflationary period can be extremely unsettling for investors. However, the impact can be more severe for retirees as they have fewer means to earn money. With a limited retirement corpus at their disposal, the falling purchasing power of the dollar is a worrying statistic. Consult with a professional financial advisor who can offer you the right retirement planning tips and allow you to retire amid times of high inflation. Keep reading to know more.

How does inflation affect retirement planning?

Inflation acts like rust. It erodes your savings and eats into your reserves. It also lowers the value of your income and increases your expenses.
All of these factors can impact your retirement planning in the following ways:

1. It forces you to lower your retirement contributions:

Inflation increases the prices of goods and services. When your essential expenses get impacted, your monthly budget can be unstable. This forces you to cut down on other costs, such as savings and investments. While you may still be able to put off your non-essential expenses, such as travel, dining out, shopping for clothes, etc., it is practically impossible to ignore essential expenses, such as rent, groceries, electricity, water, etc. To accommodate these, you may have to lower your retirement plan contributions or exit investments prematurely. These cuts may be temporary but can severely impact your overall return at maturity.

2. It can impact your net income:

The money you earn loses its value in inflation. Your salary may remain the same, but your liabilities increase. This impacts your income and spending ability. It is also rare for employers to offer hikes or bonuses during high inflationary periods. Things can be worse for self-employed individuals, daily wagers, etc., as such professionals have no formal cost of living adjustment.  

3. It can lower your investment returns:

When inflation rises, the Federal Reserve usually increases the Federal Reserve rate. This is usually done to protect the economy. However, this can directly affect companies and their earnings. The lower they earn, the fewer profits they generate and the less money they have to offer as dividends. This lowers your investment returns and impacts your earnings.

4. It affects your Social Security benefits: 

Social Security benefits are evaluated every year and adjusted according to the Cost Of Living Adjustments (COLA). This is primarily done to safeguard people from the rising costs of goods and services. As per statistics, Social Security benefits have lost one-third of their purchasing power since 2000. A high inflationary period can be detrimental to your benefits check and alter your budget in retirement.

How to plan your retirement amid inflation

Getting an inflation estimate for retirement planning can be hard. There is no way to predict the future or understand how things will be many years from now. However, you can use past data to comprehend the extent of damage inflation can do to your savings.
In addition to this, you can also use these retirement planning tips:

1. Invest in options that offer inflation-beating returns:

Inflation can quickly deplete your retirement savings corpus. Therefore, investing your money is essential when planning for retirement inflation. High-yield instruments that deliver inflation-beating returns can help you counter the impact of inflation. There are several options in this regard, such as real estate, cryptocurrencies, commodities, etc. However, these are high-risk options that can be volatile. Therefore, understanding their nature and the risk they represent is essential. You can also consider options like gold. Gold is a hedge against inflation as it usually grows in tandem with inflation. Gold prices rise with the rise in other goods and services. So, investing in it can offer you a safe haven. Gold jewelry, coins, etc., can also be a significant family asset. Further, you can also consider gold Exchange-Traded Funds (ETFs). Additionally, Treasury Inflation-Protected Securities (TIPS) are another brilliant choice. TIPS are a type of U.S. Treasury bond issued by the U.S. government. They copy the inflation rate in the country and are hence inflation protected. When inflation rises, the interest rates increase, and vice versa.

2. Continue working well after the retirement age:

If you are planning for retirement or are already retired, this advice for retirees can greatly help. Since inflation erodes your savings, it is crucial to keep earning money. If you quit your job and solely rely on your savings, you risk outliving your savings. Instead, consider delaying your retirement by a few years if inflation is unusually high. For instance, retiring in 2022 can be tough on a lot of people due to the unprecedented inflation rate of 8.5%. This is an unusual trend that will likely not be replicated soon. If you were retiring in 2022, it might be advised to postpone by a few years and work more. This can help you earn more and build a stronger retirement corpus. If you cannot work full-time due to health or any other factor, you can consider the possibility of working part-time. This may not offer you the same income as your previous job but can still add to your retirement corpus and offer some comfort in a high-price environment. Working part or full-time is one of the best ways to save money after retirement. So, do consider the possibility.

3. Keep a diversified investment portfolio:

A diversified investment portfolio can be significant to ensure optimal growth and minimal risk. Diversification is vital to beat out market volatility and other economic cycles. There are different ways to diversify your portfolio. With respect to inflation, you can consider adding international stocks and bonds to your portfolio. International stocks can offer you exposure to another country and its growth aspects. Moreover, if your returns from domestic stocks have been hampered, you can make up for the loss from your global stocks. When selecting international stocks, make sure to pay attention to aspects like the company’s core principles, ideals, government policies, and demand and supply. Further, just as with domestic stocks, it is important to diversify within international stocks as well. So, you can invest in different market capitalizations, sectors, etc. Another investment option can be to invest in international bonds. These are similar to domestic bonds but are issued by another country in another currency. They offer dividends at regular intervals and help you grow your retirement corpus steadily at low risk. However, they may not be entirely risk-free. The dividend income from an international bond primarily depends on the political and financial relations between the two countries.

Lastly, it is important to pay attention to taxation rules with respect to international stocks and bonds and invest in them only if you understand the risk involved.

4. Cut back your expenses:

One of the most effective ways to save money after retirement and even before is by lowering your expenses. The rising costs of goods and services and a high spending rate can be catastrophic to your financial health. Even essential expenses can seem burdensome in a high inflationary environment. If you add non-essential expenses to the list, your financial health can soon spiral out of control. Therefore, try to be very sensible with your money. Make a budget and be strict about your spending. It may be advised to practice some frugality when the economy is experiencing inflation. This can help you cut back your expenditure and, at the same time, understand the importance of financial discipline. You can push any impending non-essential expense like a vacation or a car purchase to another time.

Moreover, when making cuts, it is important to prioritize the necessary cash outflows. For instance, retirement contributions, insurance premiums, and even debt repayments are essential expenses that you must not ignore. Cutting down on your investments can hamper your future lifestyle. Not paying health or life insurance premiums can create higher expenses in the future. Finally, ignoring or postponing your debt repayments can lower your credit score and add to the financial burden with a higher interest.

5. Consider downsizing:

The thought of downsizing can be hard to digest. It can be harder for families with children. Downsizing also has a direct impact on your social standing. However, in some situations, it can really help. Moving to a smaller house can reduce your expenses drastically. The cost spent on maintenance is lowered. You may be able to sell some of your older stuff and earn money too. Moreover, the idea of downsizing is not just limited to moving to a small house. It is also about selecting a location with a lower standard of living. If you are open to downsizing and are still working, you can consider shifting close to your place of work to save money otherwise spent on commuting. You can also look for neighborhoods with lower rents, affordable supermarkets, etc., to suit your monthly budget.

A very helpful piece of advice for retirees who are downsizing can be to first evaluate the price of real estate in their present area of residence. If the prices are rising in your area, selling it and moving to a new city or state can be very helpful to cover the gap caused by inflation. When you do so, you can also compare the taxes of different states and then make a call.

6. Take help from a financial advisor:

A financial advisor can be very helpful in extreme situations. Inflation can be hard to deal with. Moreover, understanding its impact on the future is even more complicated. One way to get a grip on the situation can be by hiring a financial advisor. Financial advisors are professionals who can help you with multiple aspects of retirement planning. They can help with budgeting, investment planning, tax planning, etc. They can also help you downsize or relocate to another state or city. Right from the minute details to the more significant expenses, a financial advisor can be helpful with everything.

Inflation can be a time when you are second-guessing every expense. At such a time, hiring a financial advisor can also seem like an added cost. However, it is important to understand that financial advisors are an investment in your future. While their fee may seem like a burden, the value they add cannot be undermined. They are particularly helpful for people who do not understand personal finance as well and require professional assistance to manage their money. If you still want to save costs, you can consider hiring a financial advisor on an hour-only basis.

To summarize

Understanding how inflation affects retirement planning and what you can do to lower its impact is critical for a financially secure retirement. While inflation may be out of your control, you can resort to the retirement planning tips as mentioned earlier to contain the damage. It is also essential to understand that things never remain the same. In most cases, the economy stabilizes eventually, and you will be able to relax. However, until things are balanced out, being mindful and prudent with your money can be helpful.

Further, you can also consider hiring a financial advisor and taking their professional advice to solve matters. Use the free advisor match service to match with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.