Retirees are often aware of the detrimental effects of inflation on their retirement savings. As the cost of goods rises, the value and buying power of retirement accounts can diminish. For some retirees, maintaining their savings and lifestyle becomes a challenge. Savings accounts may seem like a safer option, but they generally lose purchasing power because the rate of interest is less than the inflation rate. Fortunately, there are different methods retirees can use to adjust for inflation and to help protect the value of their retirement.
How is Yearly Inflation Calculated?
Inflation is calculated using the Consumer Price Index (CPI) which calculates inflation across major categories before determining a yearly inflation rate expressed as a percentage.1 On average, the U.S. experiences an inflation rate of roughly three percent.2 The percentage identified by the CPI is helpful for understanding inflation across multiple markets. However, this value should be understood as a general approach, meaning the real impact of inflation will depend on each individual and how they spend their money. For example, we might assume a retiree will need to withdraw an additional three percent from their savings each year in order to adjust for inflation. This isn’t the whole picture. Instead this retiree should consider the specific ways inflation affects them. For most retired people, inflation is important to plan for, but their rate is far less than what is reported by the government.
Considering Individual Costs
Inflation affects each of us differently. For example, the rising cost of gasoline would impact someone that drives long distances more than someone without a vehicle. Retirement acts in a similar fashion, as it creates a lifestyle change that causes inflation to affect retirees differently.
One of the better ways to measure this difference is through the Consumer Price Index for the Elderly (CPI-E), which shows inflation rates for households with individuals aged 62 and above.3 Keep in mind this is a broad generalization of a specific population. The best way to determine the cost of inflation is to examine your personal lifestyle and make adjustments.
Managing the Effects of Inflation
Acknowledging inflation is different for everyone, here are some ways to help offset inflation during retirement.
The Social Security Administration provides the Cost-of-Living-Adjustment (COLA) to offset some of the effects of inflation by raising Social Security benefits.4 This can be an important source of income during retirement. The COLA is also based on the CPI-W (urban workers), meaning some individuals may not be able to rely on adjustments from Social Security to make up for all cost increases.4 However, 2023 should have an increase in Social Security benefits if inflation continues.
Investments that Adjust with Inflation
Certain investments can adjust with inflation. Any investment comes with risk, something that should always be considered during retirement. Be sure to consult with us before making any investment decisions.
A Change in Lifestyle
Consider your retirement goals and overall lifestyle. Is there something you can trim back on to save on the cost of inflation? This does not mean you need to give up on retirement goals, but it encourages mindfulness to help you achieve your objectives while maintaining your savings.
Consult with us to acquire a better understanding of how inflation will affect you and what you can do to help protect your retirement savings.