How Does Inflation Impact Retirement Income?
During retirement, you should be reaping the rewards of decades of hard work. Older adults look forward to retiring to finally have time to enjoy themselves after a long and fulfilling career. Whether you want to spend more time with family, travel the world, or anything you never had the time for when you were employed, retirement should be a positive thing – provided you can afford the lifestyle you want.
And because we’re living longer, it’s become more essential to have a strong source of income so you can enjoy as long of a retirement as you need. This may require relying on more than Social Security or pension payments, and it’s natural to build a nest egg through additional retirement savings plans like IRAs, 401(k)s, and other types of investments.
However, when overall economic conditions change, inflation can have a direct impact on the relative strength of your retirement income. People who are saving for retirement should ask: How does inflation impact retirement income? How can you beat inflation in retirement?
What Is Inflation and How Does It Impact Your Retirement Plan?
Inflation is the tendency for the cost of goods and services to increase over time. While you were employed, your earnings likely kept up with the inflation rate, or at least helped to mitigate its impact. Yearly pay raises are meant to combat the slow but inevitable increase in the cost of living.
Yet once you retire, the opportunities to make up for these shortfalls begin to diminish. Inflation impacts retirement income when the purchasing power of the retirement savings you’ve been diligently building over decades begins to erode. The more time that elapses, the worse the disparity gets.
How Social Security Helps You Beat Inflation In Retirement
Social Security payments undergo a COLA (cost of living adjustment) every year, which is designed to help offset the effects of inflation on at least a portion of your retirement income. There has usually been a COLA enacted every year since 1975, and for retirees who rely on Social Security income to supplement their retirement savings, it’s a beneficial feature.
However, COLA adjustments aren’t as beneficial as they might seem. Most retirees require more than Social Security benefits to enjoy retirement to the fullest. Plus, depending on how COLA adjustments are made, there are years where the payment increase is much smaller than others; in 2009, 2010, and 2015, for example, there was no COLA adjustment at all. Due to the particularly high inflation following the pandemic, the U.S. government finally in 2023 made a big hike to Social Security payments to attempt to bring it closer in line. It’s very important to find ways to supplement your retirement income in ways that don’t rely upon Social Security exclusively.
Other Ways to Counteract Inflation
With many of the services that retirees need being so closely tied to inflation, like healthcare, food, and housing, it becomes critical to find ways to make your money last in retirement. Thankfully, there are methods you can employ to help minimize how much inflation will erode your purchasing power over time. You should always of course consider consulting a financial planner.
1. Don’t Rely on Fixed Income Investments
One such method is to avoid fixed income investments such as municipal and corporate bonds. Fixed income and inflation are tied together significantly. Because the returns on fixed income investments are significantly below the inflation rate, inflation eventually erodes the profits of these investments over time.
Instead, consider focusing on investing in assets like real estate, Series I Savings Bonds, and inflation-protected treasury securities. These investments are much better suited to keep pace with inflation. In some cases, these investments might even beat inflation rates while also not exposing your retirement savings to much in the way of investment risk.
2. Downsize Your Home
In addition to making your retirement savings work for you instead of against you, there are other practical methods for ensuring your retirement income isn’t eroded unnecessarily by inflation. One of the most useful ways you can accomplish this is by reducing your overall costs in ways that don’t necessitate you having to sacrifice the quality of life you want for your retirement years.
One way to beat inflation in retirement is through downsizing your home. Maintaining a large property, that you once used to raise a family that have since moved out, can be a massive drain on your retirement income. Think ongoing and increasing property taxes, maintenance, and the like. Using the proceeds from selling a family home with plenty of built-up equity can also provide you with the resources necessary for moving to a more affordable and practical place.
3. Relocate to a Continuing Care Retirement Community
In the same vein as downsizing, relocating to a retirement community – especially one that specializes in providing a continuum of care – can be incredibly helpful in staving off the effects of inflation on your retirement income. Continuing care retirement communities (CCRCs) accomplish this by offering their residents long-term care contracts upon moving to the community.
A CCRC long-term care contract ensures that the costs associated with living in such a community are kept under control throughout the length of a resident’s stay. A Type A Contract, for instance, pre-pays many of the resident’s future health services costs at the time of move-in, locking in future healthcare needs in today’s dollars, instead of tomorrow’s. As a result, should you ever need a higher level of care such as assisted living, you will receive it at your current monthly rate, instead of paying substantially higher out-of-pocket costs. With access to such services being an important issue for many forward-thinking retirees, CCRCs have quickly become a popular choice for this reason.
Inflation and Retirement Income
It’s simply impossible to avoid the effects of inflation on fixed retirement income completely. It’s inevitable that the cost of products and services is going to increase over time — just think about how the average cost of a loaf of bread in 1980 was just $0.50 while today it averages at close to $3. This makes it crucial to prepare for how your retirement income will be eroded over time. Taking steps like investing carefully and reducing living costs, such as downsizing and moving to a CCRC, can make all the difference.
If you or a loved one are curious about CCRCs in your area, Acts Retirement-Life Communities is one of the country’s top providers. Explore 26 of our continuing care retirement communities across nine states for more information.
