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Should You Worry About How Inflation Will Affect Your Retirement Planning?

The recent rise in inflation has been impossible to miss. Food costs keep going up, the housing market is red-hot, and gas prices are high, even by summer standards. Rising prices are never fun, but it can be extra rough as the world starts reopening from COVID-19. While an annual inflation rate of 2 - 3% is both normal and healthy, we’ve seen rates measuring at 5% recently.

Inflation is especially scary for retirees, since unplanned cost increases can put a big dent in your savings. But how worried about the recent inflation numbers should you be? Let’s take a look at what’s causing inflation, why it might not be cause for concern, and how to protect your retirement plans.

What’s Causing the Rise in Inflation?

Most retirees remember the financial turbulence of the 1970s. Inflation was over 5% for the entire decade and hit 15% by 1980. The recent rise has stoked fears of a repeat performance.

Prices are rising again, but the reasons are different this time around. A plunge in oil imports caused inflation in the 1970s. While oil and gas prices are rising again, it’s not the driving force right now. Housing is a huge factor, while used vehicles and food are combining to exacerbate the problem.

The pandemic is the root cause of today’s inflation, and it was expected. Supply chains have faced disruptions for well over a year. Certain industries have recovered more quickly than others, but most areas are still struggling to catch up. Thanks to the combination of stimulus throughout the pandemic and the economy reopening, consumers have money to spend, and demand outstrips supply for many everyday goods.

Why You Shouldn’t Panic, Even if You’re Retired or Approaching Retirement

While no one can predict the future, most economists agree that post-COVID inflation is temporary and will balance out in the coming months and years.

In the short term, the Fed has a lot of tools at its disposal to manage inflation. The current economic climate has put them in a tough spot, for sure. They’re trying to maintain both price stability and low unemployment, which often require opposing strategies. Still, by carefully managing interest rates, the Fed is in a position to keep inflation from spiraling out of control.

As time passes and we gain control over the pandemic, the situation will most likely correct itself. Since supply and demand issues are driving inflation, the long-term fix is to get them back into balance. And the good news is that’s already happening in a few different ways:

  • Restoring Supply Chains -  Lockdowns and shipping delays disrupted supply chains, especially for products or parts with international suppliers. Many of these industries are still working to return to full capacity, but every step towards normalcy helps reduce the gap in supply.
  • Resuming Normal Consumption - As more people resume normal routines - whether it's back in an office or still working from home - consumption patterns are returning to more predictable levels. Coupled with supply chains slowly recovering, this allows products to be more readily available with stable prices.
  • The End of Stimulus - Stimulus packages were essential to keeping the economy functioning during the peak of the pandemic. But too much cash without enough goods to buy is a recipe for inflation. Now that prices have gone up and the flow of stimulus has ended, demand is falling back in line with available supply for most goods.

As financial advisors, we remind you to keep your focus on the big picture. Ups and downs are inevitable parts of saving for retirement, and your financial plan should have checks and balances in place for that. Still, economic turmoil can present a good opportunity to rebalance your portfolio and make sure your investments match your risk tolerance.

How to Protect Your Retirement Savings from Inflation

So how can you best protect your nest egg while you wait for inflation to stabilize? First and foremost, stick to your long-term investment process. A solid financial plan is built to withstand bumps in the road - and rash reactions to temporary setbacks can lead to even bigger losses.

Aside from sticking to your financial plans for the long haul, there are several ways you can maximize your savings and fight inflation:

  • Pay Off Debt - Excess debt is never good, but certain types are especially harmful during inflation. Any debt that’s subject to adjustable interest rates - including certain home loans - can quickly become an even bigger burden. 
  • Use Tax-Advantaged Retirement Accounts Wisely - Using the Tax Triangle is a great way to save money and maximize your savings. If you haven’t already optimized your withdrawals, now is a good time to review your plans and make your money go further.
  • Diversify Your Investments - You never want to exceed your risk tolerance when choosing investments. But if you’re comfortable moving funds from cash or money market accounts into low-risk growth stocks, it will help your investments keep pace with, or even exceed the rate of inflation.
  • Take Advantage of Social Security - If you’ve been deferring your Social Security benefits, consider whether you should start collecting. Benefits increase every year based on cost of living calculations, which helps mitigate the effects of inflation.

If you feel like your retirement plan needs a review in light of recent circumstances, consult a trusted financial professional. A fiduciary advisor can review your investments and financial plans and identify what needs work. And since they’re obligated to act in your best interest, you can trust them to help you secure your ideal retirement plans.

Looking to protect your portfolio from inflation? Download our 2021 Essential Retirement Guide to start building a more sustainable, successful retirement plan.

Essential retirement guide 2022

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