What does inflation mean for your retirement income?
Inflation is when the cost of goods and services increases over time. If you plan on living the same lifestyle in retirement that you do now, you'll need more money when inflation is a factor. Inflation impacts all income, including retirement savings accounts such as social security, pensions, and other retirement plans offered by your employer.
Here is a breakdown of what it means for your retirement savings.
Social Security is a government benefit that provides financial support to retirees or the disabled. It's one of the largest sources of income for retirees but is impacted by inflation differently than other retirement plans.
A critical part of Social Security is an annual review of the inflation index. This review aims to protect beneficiaries from losses in purchasing power. The United States Social Security Administration adjusts benefits yearly based on the cost of living as measured by the CPI-W. Unfortunately, these adjustments have historically been low. This may leave people feeling as though they have lost some of their purchasing power over time.
Some retirees will rely on their pensions as a primary source of income when they retire. A pension is guaranteed to provide you with a fixed amount for the rest of your life.
However, there are ways in which inflation can impact pensions. For example, benefits from a pension plan are typically tied to the employee's last several years' salary. Because benefits may be based on pre-inflation salaries, a retiree's benefits could be negatively impacted if high inflation occurs during their recent years of work.
In addition, inflation adjustments may or may not be included in your pension benefits. If your pension updates for inflation, corrections will be made regularly throughout your retirement. If your pension does not adjust for inflation, you will need to make up the difference on your own.
Inflation may impact your 401(k) account too in a variety of ways, impacting the value of current investments, reducing the purchasing power of current savings or income payments, or both. The purchasing power of your money shrinks when inflation rises, meaning your dollars don't go as far. Therefore, extended periods of inflation can mean you get less for your savings.
Some things you can do to help protect your 401(k) against inflation include:
- Maintain contributions: When we are in an inflationary market, and your paychecks don't go as far, reducing contributions to your 401(k) may be appealing. But contributing to your retirement fund is essential, especially if you have access to an employer match.
- Diversify investments: Broadening your portfolio may help you get returns from a mix of investments and protect against losses in any single asset class. Diversifying during periods of high price inflation, may help you manage your exposure to potential losses.
- Supplement your 401(k) savings: You may want to consider opening an Individual Retirement Account (IRA) or consider an annuity to grow your portfolio when inflation is a concern.
The best way to soften the blow from inflation, is to educate yourself on different options to customize your retirement plan. Learn more about annuities, Individual Retirement Accounts (IRAs), using a Health Savings Account (HSA), and buying life insurance plans to help supplement your retirement savings.
This blog is up to date as of July 2022 and has not been updated for changes in the law, administration or current events.