Inflation’s Ripple Effect on Your Retirement Income
Inflation is often referred to as the silent thief, as it erodes the purchasing power of your money over time. This phenomenon not only impacts your daily life but can also have a significant ripple effect on your retirement income.
Inflation’s recent rise underscores the need to understand how it can affect your retirement savings and to take precautions. In this article, we explore the impact of inflation on retirement income and provide tips on preparing for its effects.
The Effect of Inflation on Retirement Savings
Inflation erodes the purchasing power of your money, which means that the amount you save today might not be enough to cover your expenses during retirement. The prices of goods and services tend to rise over time, making it difficult to maintain the same standard of living on a fixed income. This is especially true for retirees, who may experience a significant decrease in purchasing power as their savings are subjected to the effects of inflation.
It’s important to understand that inflation doesn’t affect all goods and services equally. Some sectors, such as healthcare, often experience higher rates of inflation, which could disproportionately impact retirees who need those services the most.
The Importance of Adjusting Retirement Savings
To counter the effects of inflation, it’s a good idea to adjust your retirement savings accordingly. You need to save more, invest wisely, and create a financial plan that accounts for inflation’s potential impact on your retirement income.
This may involve re-evaluating your investment strategies, choosing investments that can help hedge against inflation, and trying to grow your retirement savings at a rate that outpaces inflation.
Investment Strategies to Hedge Against Inflation
Certain investments may help protect your retirement income from inflation’s eroding effects. Consider incorporating the following strategies into your financial plan:
Invest in inflation-protected securities: Treasury Inflation-Protected Securities (TIPS) are U.S. government-issued bonds designed to adjust to inflation. The principal amount increases with inflation and decreases with deflation, helping to protect the purchasing power of your money.
Diversify your portfolio: A well-diversified portfolio that includes a mix of stocks, bonds, and other assets can help protect your retirement savings from inflation. Equities, for example, have historically outpaced inflation over the long term and can provide a potential hedge. It can be a good idea to talk with a fiduciary financial advisor to help select the appropriate diversification strategy to meet your goals and needs.
Invest in real assets: Some real assets, such as real estate, may offer a hedge against inflation. As the prices of goods and services rise, the value of these assets typically increases, helping to preserve your purchasing power.
Adjusting Your Retirement Income Streams
In addition to adjusting your investment strategies, you might consider modifying your retirement income streams to help mitigate the effects of inflation. Some options to explore include:
Delaying Social Security benefits: By postponing your Social Security benefits, you can increase your monthly payout, which can help offset inflation’s impact on your retirement income.
Working part-time or pursuing a side job: Earning additional income during retirement can help supplement your savings and offset the effects of inflation on your fixed income.
Final Thoughts
Inflation is an unavoidable economic reality that could profoundly impact your retirement income. By understanding its effects and adjusting your financial plan accordingly, you can better prepare for retirement. If you have questions about inflation’s specific effect on your finances, consider talking with a fiduciary financial advisor.
Our wealth management firm helps clients plan for the effects of inflation through our ongoing financial planning. Schedule a complimentary, 15-minute chat with a fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.