How to Account for Inflation in Retirement Planning

Inflation is a term that comes up a lot in economic discussions. But do you really know what it means?



One thing’s for sure—inflation can chip away at your retirement savings. But don’t worry, a solid retirement plan can help you stay financially secure. As prices increase over time, your money won’t go as far, which is why you need to consider inflation. It's an important factor to consider when planning for retirement and managing your personal finances.

Some of the most common strategies to combat inflation include diversifying your portfolio and investing in retirement accounts. In this article, we’ll look at how you can keep your retirement savings on track despite rising inflation rates.

Key Takeaways

• Inflation can decrease your purchasing power, so plan for it in your retirement strategy.
• Understanding inflation trends helps you anticipate its impact on retirement.
• Diversifying investments in stocks and real estate can protect your savings.
• Adjust your budget and income sources to manage rising living costs.
• Create a flexible retirement budget to adapt to inflation.

Understanding Inflation and Retirement

What Is Inflation?

In simple terms, inflation measures how fast the prices of goods and services are rising. Inflation can be seen in the rising costs of everyday items like groceries or fuel.

Over time, each dollar you have buys a little less, which means your purchasing power decreases.

The Federal Reserve seeks to monitor and control inflation to ensure economic stability. The Fed has an annual inflation target of 2%, which is generally seen as acceptable.

Two percent may seem small, but even moderate inflation can really hurt your buying power.

Suppose the inflation rate is 3% per year. Something that costs $100 today will cost $103 next year. While this seems small over a year, it can still impact your retirement savings.



If your savings or investments don’t grow at the same rate, you’re losing money.

Historical Trends of Inflation

We’ve seen various periods of inflation throughout history.

In the 1970s, the US saw high inflation, sometimes reaching double digits. In contrast, the past two decades have had lower rates, often between 1-3% annually.

But after the COVID-19 pandemic, inflation soared to 9.1% in June 2022. The pandemic-era inflation was mainly due to energy price shocks.

These trends are tracked using the Consumer Price Index (CPI), which measures changes in the cost of a basket of goods and services. Understanding these trends helps you anticipate how inflation may impact your retirement.

The Impact of Inflation on Retirement Savings

Many retirees are often vulnerable to the impacts of inflation.



First, they mostly rely on fixed incomes like pensions, which don’t adjust to keep up with rising prices. They also have less capacity to increase their income due to age and health reasons.

As you reach full retirement age, it’s crucial to plan for higher expenses and adjust your retirement savings to keep up with inflation. This proactive approach allows you to maintain your desired lifestyle throughout retirement.

Investment Strategies to Combat Inflation

When you plan ahead, you can make informed choices that keep your standard of living steady throughout retirement. Protecting your retirement savings against inflation involves using a variety of strategies. Let’s discuss each one of them:

Diversify Your Retirement Portfolio

Spreading your investments across different asset classes is the key to managing risk.

Think of your investment portfolio as a pie.

Each slice represents a different type of investment. This includes stocks, bonds, real estate, and other investments.

If the stock market dips, others can still thrive. Having a well-balanced pie ensures stability and growth potential.

You need to invest wisely to combat inflation during retirement. Stocks are great options as they often provide higher returns over time. Yes, they come with some risk. But they can help your retirement funds keep pace with inflation.



In addition to diversifying investments, think about putting your money into 401(k)s or IRAs. These retirement accounts might help your savings grow faster than inflation.

Consider Treasury Inflation-Protected Securities (TIPS)

Looking for other ways to protect your investments from inflation? Treasury Inflation-Protected Securities (TIPS) might be just what you need. These are bonds issued by the US government. The principal value of TIPS increases with inflation, based on the Consumer Price Index (CPI).

What does this mean for you? As inflation rises, so does the value of your TIPS.



It’s like having a financial safety net that grows stronger as the cost of living goes up. If inflation goes up by 2%, the value of your TIPS will also increase by 2%. This is a personal finance tool that can keep your purchasing power intact during retirement years.

Focus on Stocks and Real Estate

Investing in dividend-paying stocks provides a steady income stream. Companies that regularly increase their dividends can help your income keep pace with inflation.

In personal finance, investing in stocks and real estate can be crucial. Real estate can also be a good hedge against inflation. Property values and rental income tend to rise with inflation, providing a buffer for your retirement income.

Don’t forget about real estate investment trusts (REITs). These provide both income and diversification to your portfolio. With REITs, you can invest in rental properties without the hassles of direct property management.



Balancing your retirement portfolio with these assets can help ensure your investments grow over time.

Retirement Income Sources and Adjustments

As you plan for retirement, you need to regularly evaluate and adjust your income sources. This includes Social Security, pensions, and personal savings.

Social Security Benefits and Cost-of-Living Adjustment

Many retirees rely on Social Security benefits as their main income source. Each year, these benefits might get a boost through a Cost-of-Living Adjustment (COLA).

However, these adjustments may not be enough, especially if your healthcare costs rise faster than inflation.

Since early retirement at age 62 is optional, you can delay taking your benefits to maximize the lifetime payout.

For every year you delay, you get a bump of 8% in your benefits until you reach full retirement age (up to age 70). This gives you a higher retirement income to enjoy in the future.

Take note that this strategy isn’t one-size-fits-all. Factors like your health, life expectancy, other income sources, and tax issues should all be considered.



This is where a financial advisor like Leonard Financial Solutions comes in. Consulting with a financial advisor can help you weigh these factors and create a retirement strategy that works best.

Pension and Retirement Account Adjustments

If you rely on pension income, it's a good idea to check if it includes inflation adjustments. Some pensions offer cost-of-living adjustments, but not all of them do. Understand the terms of your pension to know if your benefits will keep pace with inflation.

For those relying on 401(k)s or IRAs, adjusting your withdrawal strategy is key. It’s recommended to withdraw about 4% annually.

But you might need to tweak this rate depending on inflation and your investment returns. If inflation rises faster than expected, reduce withdrawals to stretch your savings.



Aside from retirement accounts, consider buying annuities with inflation protection. These annuities increase your guaranteed income over time to match inflation rates.

Alternative Income Streams in Retirement

Beyond Social Security and pensions, consider alternative income streams to help offset inflation.

Part-time work is one option. Even working just a few hours a week can boost your retirement income. Plus, some retirees turn their hobbies into small businesses. This helps them turn in extra cash without the stress of a full-time job.



By having multiple income sources, you create a more stable financial situation that can better withstand the effects of inflation.

Planning and Budgeting for Rising Living Costs

Preparing for rising living costs is a crucial part of retirement planning. Here are some key steps to ensure you're ready:

Create a Flexible Retirement Budget

Start by estimating your yearly expenses for your “needs.” These include housing, food, and utilities. Next, add a bit extra for your “wants” like travel and hobbies.

Your retirement budget should be able to adapt to inflation. Imagine you retire today, and you expect to spend $50,000 annually. With a 2.5% inflation rate, you will need $51,250 the next year to maintain the same lifestyle.



When inflation is high, focus on essentials and cut back on non-essential expenses. Always reassess your spending habits and adjust your budget as needed. By doing so, you can ensure that your retirement savings will last longer.

Healthcare Costs and Long-Term Care Planning

Your medical costs can take a significant chunk out of your retirement savings. That’s why it’s important to plan ahead for costs like premiums, co-pays, and out-of-pocket expenses.



Medicare costs can rise quickly, eating into your budget. To avoid unpleasant surprises, make sure to factor these into your retirement plans. Since Medicare doesn’t cover everything, long-term care insurance is what can help to alleviate these costs.

Frequently Asked Questions

Thinking about inflation during retirement can be tricky, but there are some good strategies to help keep your finances stable. Here are some frequently asked questions and answers on the topic.

The Bottomline

Not preparing for retirement is one of the biggest mistakes you could make. Don’t let inflation eat away your hard-earned savings.

Let Leonard Financial Solutions help you create a solid retirement plan that account for inflation. We’ll guide you in ensuring your financial stability in the many years to come.



Book a free consultation today to get started!