Iowa Inflation Planning

Inflation & How it Affects Your Retirement Savings

The rate of inflation may be cooling down, but what effect has the last few turbulent years had on your golden years? And how do you include inflation management into your future retirement plan? Let’s find out.

The size of your retirement nest egg can be greatly influenced by several factors. Elements such as savings rates, market fluctuations and taxes to name a few. One major factor that is often overlooked is the impact of inflation on your purchasing power during retirement.

Over the past decade, inflation rates have remained relatively stable, hovering around 2%. But in June 2022, inflation rates reached their highest point in 40 years at 9.1%.  And inflation hit the Midwest (and the South) the hardest.

With inflation prevalent in Iowans’ lives, we are all hoping this was a one-time occurrence, but since we cannot accurately predict the future, it is still important to plan for inflation in your future financial plan.

So, what does inflation mean for your retirement? Understanding how inflation can impact your savings and taking steps to help protect against it are crucial steps in helping to ensure the security of your retirement savings.

What is Inflation?

Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time.

The Bureau of Labor Statistics calculates inflation by using the Consumer Price Index. The CPI measures the cost of goods and services. The inflation rate is the percentage change in the CPI from the previous period. Inflation can cause prices to rise over time, reducing the purchasing power of money. The Federal Reserve aims for the inflation rate to stay at a healthy 2% increase per year.

However, factors such as the COVID-19 pandemic, increased demand, and supply chain issues have caused inflation to reach some of its highest levels in decades, affecting every Iowan where it hurts – our wallets.

What Inflation Means For Your Retirement

Inflation is a silent threat that can erode the value of your retirement savings and investments over time. Small inflation increases may not seem significant, but over time they can add up and affect your purchasing power in retirement. This means that the cost of housing, food, medical care, and other expenses are likely to be higher in the future.

Many American retirees feel that inflation is hampering their ability to save. Moreover, 63% of retirees feel that they are being pushed off track financially. This is why it is important to consider inflation when planning for retirement.

To help avoid inflation affecting your retirement savings further, it’s crucial to maintain a strong savings strategy to help ensure you have enough money in retirement to maintain your standard of living. You can do this by adjusting your retirement contributions and budget with inflation in mind. An online retirement income planning calculator can help you determine the amount you need to save to meet your future goals. By doing so, you can help protect your nest egg and help ensure a comfortable retirement – despite inflation.

Protecting retirement savings from inflation is challenging as rates are unpredictable. However, there are steps you can take to help reduce inflationary risk and help manage the effect of inflation fluctuations on your hard-earned nest egg.

Don’t Put All Your Eggs in One Basket

Diversification is a key principle of investing that can help reduce risk and increase potential returns. There are several reasons why you should diversify your investments:

  1. Risk reduction: By spreading your money across different types of investments, you can help minimize the impact of any losses in one area. This can help protect your portfolio from market volatility and help reduce your overall risk.
  2. Potential for higher returns: A diversified portfolio can include investments with varying levels of risk and return, allowing you to potentially earn a higher return over time.
  3. Balance: Diversifying your investments can help ensure that you have a balanced portfolio, which can include a mix of stocks, bonds, and other assets. This can help reduce your overall risk and help provide stability to your portfolio.
  4. Protection against market fluctuations: Diversifying your investments can help reduce the impact of market fluctuations on your portfolio, as losses in one area may be offset by gains in another.

While diversifying your investments is important because it can help you manage risk, increase potential returns, achieve balance, and protect against market fluctuations, it’s important to keep in mind that diversification does not guarantee a profit or protect against loss, and investing always carries some level of risk.

Further Tips That Can Reduce Inflation

Asides from diversifying investments, being aware of inflation is a crucial part of retirement planning. It’s important to regularly review your savings and investments and prepare for potential changes. To do so, you can consider the following steps:

  1. Save more: You may want to consider saving more than you originally planned to help account for inflation’s impact on your purchasing power.
  2. Consider inflation-protected investments: There are investment options, such as Treasury Inflation-Protected Securities (TIPS), that are specifically designed to help protect against inflation. These investments help provide a fixed rate of return that is adjusted for inflation, which can help ensure that your retirement savings keep pace with the cost of living.
  3. Work with a local Fiduciary advisor: A financial advisor can help you develop a retirement plan that takes into account your personal financial goals and risk tolerance, and can provide guidance on how to help protect your savings against inflation. A Fiduciary must put your best interest above their own as required by law. A financial advisor who’s a fiduciary has an ethical duty to recommend the best investments for you.
  4. Consider working longer: By delaying retirement, you may be able to accumulate additional savings and help reduce the number of years that your retirement income needs to support you.
  5. Plan for ongoing income: Consider creating a retirement plan that includes ongoing sources of income, such as part-time work, rental income, or a small business. This can help reduce your reliance on your retirement savings and help provide additional protection against inflation.

It’s important to remember that there is no single strategy that can completely protect against inflation, and that investment values can fluctuate and may be worth more or less than the original cost. It is also important to consult with a financial advisor to help determine the best approach for your specific situation.

Final Thoughts

Incorporating inflation management into your retirement planning can be a challenge, but you don’t have to go it alone. A Fiduciary advisor like Matthew P. Johnson of Johnson Wealth and Income Management can assist you in creating a retirement plan that includes strategies to help minimize inflation’s impact on your savings.

Ready to help inflation-proof your retirement plan? Contact us today to get started.

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