How Can I Know My Retirement Savings Is Inflation Proof?

Jenny Handwerk |

How Can I Know My Retirement Savings Is Inflation Proof?

Everyone is feeling the effects of inflation on their wallets. Over 70% of Americans are anxious about how inflation may affect their retirement savings strategy. High inflation currently affects everyone, but those in retirement may experience it more acutely.

Anyone close to retiring can also make the same statement. We conducted research earlier this year and discovered that over half (54%) of adults over 50 worry that the rising cost of living will prevent them from having enough money to support themselves when they stop working.

Your expected revenue and what you need to pay your bills could differ due to rising pricing. If you need to withdraw more money from your retirement assets, the long-term stability of your retirement income plan may be jeopardized.

The damaging impact of inflation over time reduces the purchasing power of every dollar you've saved and can derail even the most carefully thought-out retirement plans. Fortunately, there are measures investors can take to protect their retirement assets from inflation.

Things You Should Do to Protect Your Retirement Savings 

Avoid carrying too much cash.

Everyone should have some money in savings and bank accounts to pay for ordinary expenditures, save for emergencies, and prepare for significant purchases. However, cash is rarely a good long-term investment, especially when the economy is undergoing significant inflation. As inflation takes its toll, you can buy fewer products and services with your money each year.

If you have more cash than you need, consider putting some of it into long-term investments that can help you keep your purchasing power over time.

Keep your retirement savings on track.

You should have nine times your income by the age of 60. Consider making catch-up contributions if you need to catch up. Anyone over 50 can contribute an additional $7,500 to their 401(k) plan each year in 2022, as well as an additional $1,000 to their Traditional and Roth IRAs combined.

Use a bucket strategy.

Spreading your money across several asset classes, such as cash, stocks, and bonds, is an excellent method to reduce your risk. It might also be a good method to protect your retirement savings from inflation.

A bucket technique creates diversification for those of you who use income drawdown for some or all of your money.

This method divides your pot into several portions based on when you want to extract income from them. Three 'buckets' are a good starting point, but you can add more to meet your retirement goals.

Examine your budget and consider making short-term changes to your spending.

You can decrease expenditures and limit expenses to prevent needing to take greater distributions than expected in the short term. For example, if you can reduce your energy consumption, a surge in inflation has less of an impact on your budget. 

You may also need to reduce some discretionary spending, such as downsizing or canceling a scheduled vacation or home improvement. If you believe recent price increases are only temporary, deferring a large expense may make sense. 

Consider Commodities

While equities and bonds tend to outperform when inflation is low, commodities prices tend to rise in tandem with inflation. As a result, investing in commodities might be an intriguing inflation hedge. You don't have to buy actual barrels of oil to have exposure to commodities; you may do so through specialized mutual funds and exchange-traded funds.

Consider the influence of inflation on your overall financial plan regularly.

An efficient retirement strategy depends on accurately assessing how much a household spends. The value will likely alter yearly in a high-inflation climate, so it must be updated regularly.

Similarly, changes in inflation rates, market conditions, or circumstances will necessitate adjustments to your retirement strategy. If you utilize planning tools or consult with a financial advisor, carefully evaluate the inflation estimates you will employ in the future. 

Consider delaying Social Security payments.

If you're approaching retirement age and concerned about how inflation will affect your golden years, consider deferring the start of your Social Security payments.
You can begin receiving benefits at any time between the ages of 62 and 70, but the amount doubles for each month you wait until you reach the age of 70.

Finally, inflation is one of several hazards to consider when planning for retirement. A proper wealth-building strategy can help you retire comfortably and on your terms. To ensure your plan is on track, you should review your retirement portfolio at least once a year and adjust as needed.