Photo of Ray Ferrara CFP Ray Ferrara CFP Jun 01, 2022

Inflation refers to the sustained increase of prices and goods over a specified time period. An increase of inflation is a sign that there are too many dollars chasing too few goods. It can also be caused by a shortage of certain supplies, which drives up the price of goods and lowers the value of money. Right now, we are experiencing some of the highest records of inflation in decades. The consumer price index increased 8.6% over the past 12 months, according to data from the Bureau of Labor Statistics.

While inflation is on the minds of many investors, this would not be the first time that this has happened. Periods of inflation have happened multiple times throughout the country’s history. In the past, the economy managed to right itself again, and the increase of prices have eventually slowed down. But, if you are nearing the edge of retirement, you may be worried that the decreased value of your savings will negatively affect your retirement. 

How does inflation affect my retirement plans?

Inflation can erode the purchasing power that your money will have in the future. The costs of food, housing and other basic necessities rise, and the money that you have saved for retirement will be able to buy less than it did when you invested the money. 

For most retirees, government benefit programs such as Social Security represent a large source of income. During times of inflation, the Social Security Administration provides an annual cost-of-living adjustment to keep up with rising costs. This adjustment is determined using the current consumer price index (CPI). However, this does not always do enough to counteract the impact of inflation. 

The CPI does not take into account sectors such as housing and health care, which have experienced price increases greater than in other sectors. Adults who are retired likely spend a larger portion of their income on health care. Medicare premiums have risen by over 14%, which is nearly double the national rate of inflation. Many retirees may find that the cost-of-living adjustment does not do enough to shield their Social Security income from the effects of inflation. 

What can I do to protect my retirement from the effects of inflation?

If your retirement is on the horizon, you may not have the luxury of waiting around for inflation rates to go down again. However, there are still ways to minimize the effects that inflation will have on your retirement savings. Working with a CERTIFIED FINANCIAL PLANNER™ professional is highly recommended for anyone planning for their retirement. These experienced professionals can look at your financial situation in a holistic way and determine the best strategies to help you meet your retirement goals. 

To protect your retirement from the negative effects of inflation, CERTIFIED FINANCIAL PLANNER™ professionals recommend taking a look at a few of these strategies:

1.Diversify your investments —A diverse portfolio can help to protect your retirement from the effects of inflation. A combination of different assets can protect your portfolio if one or more of those assets ends up performing poorly. These assets should include stocks, bonds, real estate investment trusts and potentially commodities. Financial planners also recommend portfolios that are global and have international investments as well.

2. Choose inflation-resistant assets — Assets with fixed, long-term cash flows usually perform poorly during periods of high inflation. Experts recommend investing in a combination of assets that have historically performed well during periods of high inflation.

  • Real estate investment trusts (REITs) — Instead of investing in tangible real estate assets, experts recommend publicly traded REITs. A REIT is a company that owns, operates or finances real estate. These assets are more liquid and can be easily bought and sold in the market..
  • TIPS — Treasury inflation-protected securities, or TIPS, are a kind of U.S. Treasury bond. These bonds are designed to increase in value to keep pace with inflation. Their principal is linked directly to the consumer price index and is reset according to changes in the index. When the CPI goes up, so do your rates of return. TIPS are a good investment for anyone worried about the negative effects of inflation.

3. Invest in long-term care insurance — With the costs of health care rising faster than the rate of inflation, it’s helpful to start thinking about how you are going to be able to pay for care if you need it.According to the U.S. Department of Health and Human Services, roughly 70% of adults who are nearing the age of retirement today will require some type of long-term care. Purchasing long-term care insurance can help protect your retirement savings from the costs of long-term care. 

Since long-term care insurance isn’t normally provided by employers, investors will need to purchase their own stand-alone plans. It is important to choose a plan that protects you from the effects of inflation. Many plans include options such as automatic compound benefits growth to protect against rising inflation. Your retirement plan consultant could also recommend long-term care annuities that come with compound inflation protection.

4. Increase your savings —Increasing your retirement savings each year can help to protect your retirement savings from inflation. While most experts agree that 10% to 20% of your take-home pay should go toward your retirement account, this is more than many people can afford. This is especially true during times of high inflation. 

At a minimum, consider increasing your contribution by 3% each year to counteract the impact of inflation. If you contribute $4,000 to your retirement account this year, you would increase your contribution by 3%, to $4,120, next year. Experts suggest that you should try to increase your contribution by 1% more of your pay until you reach the ideal amount. 

5. Maximize your 401(k) contributions — If you are over age 50, you are in the position to take advantage of catch-up contributions into your 401(k) account. For the year 2022, that is a maximum of $6,500, plus the under 50 maximum contribution of $20,500. For traditional 401(k) contributions, you don’t pay tax on your contributions, so you have to pay when you withdraw the money. Roth 401(k) contributions are the opposite — you pay tax on contributions now and when you withdraw money in retirement, the money comes out tax-free. 

6. Downsize your living situation —Inflation has affected the housing market at a far greater rate than other necessities. Even if your home is completely paid off, homeowner’s insurance and property taxes have continued to rise. Property taxes and homeowner’s insurance are both based upon the current value of your home. The typical homeowner in the state of Florida pays $2,035 annually in property taxes alone.

Now might be a good time to consider selling your higher-value home and downsizing. Not only will you reduce the amount of your housing costs, you may also make a sizable profit from the sale of your higher-value home. That profit can be reinvested into your retirement savings.

Talk to a ProVise CFP® professional about protecting your retirement from the effects of inflation

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about meeting your retirement goals? Contact ProVise today to schedule a complimentary consultation.