How to Plan for Inflation in Retirement

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A simple financial report showing a graph line plotted on a dark blue pixilated background.

June just posted the largest increase in the cost of living since 2008, highlighting the spiraling power of inflation to eat away at our spending power. That means that the purchasing power of a dollar is down from where it was as recently as last year, thanks to higher prices on cars, food, clothing, travel and more, according to the Bureau of Labor Statistics.

We have no idea what will happen in the future and this might just be a bump in the road of a 30+ year retirement planning process. But what if it’s not? Will your retirement accounts be enough to sustain you if the cost of living is far higher decades from now?

What life really costs as of 2021

  • Consumer prices are rising at a yearly rate of 5.4% as of June, the biggest jump since 2008
  • The consumer price index climbed 0.9% in June alone, well exceeding estimates
  • The rate of inflation in the 12 months ended in June climbed to 5.4% from 5%. The last time prices rose that fast was in 2008, when oil hit a record $150 a barrel.  

But… the experts still aren’t worried: “The spike in inflation still looks to be primarily Covid-related and temporary as outliers continue to drive much of the upward push in prices. But the effects of the recent jump could linger for consumers for some time with above-average costs extending into 2022.” — Ben Ayers, Nationwide senior economist

What inflation means for retirement

Inflation comes and inflation goes. One of the best things about retirement planning is just how long it all takes. A lot can change over the course of 40+ years, but with careful planning you can weather the ups and downs and come out on top.

That’s why financial planners consider a well-diversified portfolio to be one of the best hedges against inflation. What does that look like?

  • Cash is good for short-term expenses and emergencies but the younger you are the more you need to focus on equities and asset growth.
  • Stocks tend to keep pace with inflation over the long-term, despite the risks associated with an equity heavy portfolio.
  • Fixed income isn’t as good for growth, but Treasury Inflation-Protected Securities (TIPS) assets are designed to help offset inflation. 
  • Owning a home is a time-tested way to generate wealth that keeps up with inflation.

Beyond diversification, consider deferring Social Security. As you get more per month the longer you wait to claim benefits, those payments help to take the edge off of inflation as they are adjusted for the cost of living.

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