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Inflation’s Impact on Retirement Savings

Inflation’s Impact on Retirement Savings

Inflation: the nine-letter word currently belonging to almost every consumer’s vocabulary. Inflation, though it may not need an introduction, is most simply defined as the periodic rate of increase in various goods and services. And If you’ve purchased anything in the past two years, you’ve likely felt the hard and strong effects of inflation.

As a consumer, you may have a painstaking awareness of how inflation impacts things like the cost of your groceries and the amount of money it takes to fill up your gas tank. However, something that may have never crossed your mind is how exactly Inflation impacts your retirement savings. Even if you are taking all the essential planning steps for your retirement, the sad truth is that Inflation can have a major impact on your post-work-life savings.

While the recent inflation surge has forced us to rework our budgets, it’s also important to examine the impact inflation will have on the future income you will receive in your golden years as well. We will examine this impact in this article and also provide the best ways to soften the blow inflation will have to your retirement savings.

Understanding Inflation Rates: Past and Present

To first understand inflation and its impact on your retirement savings, you must first understand inflation rates. There are three things we need to address to begin to conceptualize the past and present of inflation rates.

The first question that likely pops into your mind is: “Hasn’t inflation always been present in our economy?” The short answer to this is: yes, Inflation has always been inevitable. It’s the reason why the average cost of homes was $18,000 in 1963 compared to $454,900 in 2022 (per Yahoo Finance.) Due to the change in the value of the dollar, you will never score an “average” home for $18,000 again as 1963 dollars are not the equivalent of 2022 dollars.

So, what exactly causes this increase in prices? While there is no simple answer to that question, the fact is many different things contribute to the cause of inflation. Increasing money supply, the change in the trend of supply and demand, and the interest rates established by the Federal Reserve are just a few of many factors.

The final thing to consider when understanding the concept of inflation is how exactly inflation is measured. The typical and most well-known indicator for inflation is the Consumer Price Index (CPI). While there are other indicators, the CPI as maintained by The Bureau of Labor Statistics is the most widely acknowledged inflation indicator.

Inflation Then Vs. Now

While inflation has been present as long as economies have, there has suddenly been a sharp increase in inflation in the past two to three years, post the COVID-19 pandemic. The US Bureau of Labor Statistics reported an all-time 12-month high last year in June of 2022 with prices up 9.1%. This makes for the largest increase in inflation we have seen in 40 years.

A loaf of white bread that would have cost you $1.46 in August of 2021 now costs you $1.90 as of August 2023. That $0.44 cent difference may not seem material, but imagine if every single grocery item you purchased saw a 30% increase in just a year’s time. You’d definitely be feeling that hole burning in your wallet.

To better illustrate just how drastic this sudden rise was over the past two years, let’s examine historical inflation rates. On average, the US Reports an annual inflation rate of around 2.5-3.0%. This has been pretty consistent over the past couple of decades, barring 2009. Inflation in 2009 was sitting in negative territory, with sources citing around -0.40%. This likely coincides with the global financial crisis and recession of the same years.

According to this CPI Inflation Calculator, $1.31 in 2009 is worth $1.87 today in 2023. This is a price increase of 43.11%, also meaning that today’s prices on goods and services are 1.43 times higher than average prices back in 2009. In layman’s terms, the value of the dollar doesn’t stretch as far, having a purchasing power of 70.053% of what it did a mere 14 years ago.

Thinking back to how the past few years have been going, it may offer an explanation for the inflation situation. We are sure at this point you are slowly and begrudgingly nodding your head in aching realization. The problem is a bit more clear now, isn’t it?

How Inflation Erodes Retirement Savings Over Time

The Normal Retirement age (or “Full Retirement” age) is currently age 67, according to the Social Security Administration. This is the age you must be to collect full Social Security benefits. While some people are able to retire before 67, many unfortunately are not. In addition to the funds you are able to draw from the Social Security programs, chances are you will need your own retirement savings to keep up a comfy life as a retiree.

Since inflation causes money to lose value over time, the value of your dollars at retirement age will be less. Inflation also diminishes the purchasing power as the cost of expenses occurring in the future will be greater.

In other words, if you save enough money today to cover all of your expected monthly expenses for 10-20 years in your retirement life, there is a chance you will fall short as expenses will inevitably rise due to inflation. The amount of money you may be able to live on today will be different many years from now, even if you vow to live a simple retirement life.

How can you prevent inflation from eating away at your retirement savings? Higher contributions or a change in investment strategy can help maintain future purchasing power. Consider being more aggressive with your investment elections, too. But, we’ll cover that in more detail later.

The Impact of Inflation on Fixed Income Retirees

While inflation hits everyone hard, it hits retirees even harder. And more specifically, retirees living on a fixed income are especially subjected to the hardships of the rapidly increasing prices of goods and services.

If you are a member of the workforce, chances are you get annual raises every year. Chances are you may even make periodic career changes to maximize your earning potential. Sadly, when you are a retiree living on a fixed-income, you do not have the luxury of periodic wage changes. To live on a fixed-income means just that: your income stays the same—forever.

While your income remains the same, the cost of things will not. $5 today is not worth $5 a few years from now. The cost of necessities will not remain constant either. Therefore, if you live on a fixed income, the money you pocket in the beginning of your retirement life will not have the same value several years down the road.

Social Security and Inflation

Many retirees rely on Social Security in addition to their own savings, pension, or other retirement plan. Social Security is a U.S. government program designed to help financially assist select groups of individuals, retirees being one of those groups. As of data reported in August 2023, 71.2 Million Americans receive some form of Social Security benefits.

Social Security is a program entirely constructed to help provide a financial buffer to citizens. Taxpayers, specifically those in the workforce, pay into the program with the promise that they will one day get to reap the benefits of drawing from the program. And for some retirees, Social Security is the primary source of their retirement income.

Cost of Living Adjustments (COLA) are periodic increases to various benefits and wages, Social Security being one of the benefits that utilize a COLA. As the name suggests, the increase in wages is calculated based on a change in the cost of living index.

The U.S. government mandates COLA to assist in curving the pain felt from inflation for eligible individuals who draw Social Security benefits. The truth: COLA doesn’t always keep pace with true inflation. This is especially true with healthcare costs in retirement.

The COLA amount for 2023 is 8.7% as reported by the SSA. While this increase sounds to be on par with the 9.1% inflation of 2022, seniors drawing benefits prior to this year haven’t quite been able to recover the losses incurred with the sudden inflation spike in the past few years. The COLA tends to be calculated based on previous inflation statistics, meaning the adjustment is usually behind the trend.

Inflation tends to be sudden, usually onset by various economic factors. It isn’t always predictable. The time it takes the government to come up with the new annual COLA and this time elapsed also creates the gap between inflation and the adjustment.

Additionally, insurance premiums, like Medicare Part B, are deducted from the benefit payments to seniors drawing Social Security. Medicare has been increasing steadily and the COLA for Social Security benefits does not factor in the high costs of Medicare. It pays to plan for these additional healthcare costs when evaluating your retirement income.

Strategies to Counter Inflation in Retirement Planning

If beads of sweat are developing on your forehead out of fear of how you will afford to live out your golden days, we are here to say do not fret. We understand how the thought of the effects of inflation on your retirement can be both scary and stressful to manage.

You spend the majority of your years working, it’s a no-brainer that you want to enjoy your retirement and not have to stress about how you will afford the necessities. However, we are happy to inform you that there are ways to counter Inflation with your retirement planning. There are things you can do now and strategies you can create to navigate the financial challenges posed by inflation.

If you want to minimize the impact inflation will have on your Retirement Savings, you will most definitely want to read on as we have some solid suggestions.

Increasing Retirement Contributions

First and foremost, consider increasing your retirement contributions. If you are unable to pump a bunch of money into other types of investments, focus on pumping more money into your current retirement plan. Rather this is an employer-sponsored 401(k), a self-managed IRA, or other plan, it literally pays to increase your contributions periodically.

Consider increasing annually or when you are given a raise. If you are given a 3% raise annually if you increase your contribution by just 1% annually, this can have a great impact. Because of the powers of compounding interest the more money you have the more your money will grow.

Let’s do a simple example: let’s say you have an annual Salary of $60,000 and you receive a 3% increase annually. If you contribute 3% of your income ($150 a month your first year), excluding any employer match, in 30 years you will have roughly $251,000 with a 7% return. If you increase this contribution to 7%, your new hypothetical account will be around $587,000 with the same rate of return in the same time period. This amount will be even higher the more you contribute.

Additionally, if you are participating in an employer-sponsored plan, make sure to take advantage of the employer match, if offered. An employer match is essentially free money that you are given just for participating in the plan.

Diversification of Investments

Another strategy to lessen the painful effects of inflation when it comes to your retirement account is to diversify your investments. Diversification is a strategy of dispersing your investments among many types of markets or assets. Diversifying your investments will decrease the impact of a single asset’s negative performance on your overall portfolio.

Diversification prevents you from relying on the performance of a single asset, that way you lose less in the event that asset isn’t doing so well. Diversification is a great investment strategy overall but it is super helpful in risk mitigation when it comes to inflation management in your overall portfolio. You can make the decision to distribute more of your investments into mutual funds that contain stocks that keep up with the inflation curve.

Retirement Accounts and Tax Considerations

You may think of savings accounts within the context of a traditional bank account. But, retirement accounts are also savings accounts, technically. It’s also important to note the potential tax implications of each type of account. Not only is keeping up with inflation imperative to get the most out of your retirement account, but making sure you have the best type of account for your unique situation is important as well.

Depending on the type of account you have, you may need to also plan for tax payments or early withdrawal penalties. The value of the dollar will change over time, and so will tax rates and tax breaks, so it’s important to consider this when selecting your retirement plan. There are many types of retirement accounts but we will focus on two main types and a few subcategories of these types.

Individual Retirement Accounts (IRAs)

An Individual Retirement Account is an investment account usually offered by a variety of financial institutions, stockbrokers, or even insurance companies. IRAs allow you to make tax-deferred deposits that are then invested for use in your retirement years.

IRAs can be bank-issued Certificates of Deposits, which yield a flat interest rate or can be invested in the market to encompass a portfolio of various stocks, bonds, and funds.

There are a variety of IRAs, the four main types being:

  • Traditional IRAs – Tax-advantaged plan where the contributions are made pre-tax. The contributions are often tax-deductible as well, which decreases your annual taxable income. Tax is deferred until the time of the withdrawal (currently age 59 ½ to avoid additional penalties) at which time you would pay taxes as if the funds were ordinary income. Keep in mind you will pay the going tax rate at the time the funds are withdrawn, not what the tax rate was when you contributed. Traditional IRAs also include Required Minimum Distributions (RMD) once you hit retirement age, meaning you are required to withdraw a certain percentage of the plan regardless of whether you need the funds or not.
  • Roth IRA – Named after Senator William Roth, Roth plans became an option in 1998. The account is not taxed, with contributions being made after tax has already been paid on the income. This means that during retirement, all withdrawals will be tax-free as you’ve already paid the taxes once. RMDs are also not required on Roth plans.
  • SEP IRA – This type of account allows an employer to make contributions to a traditional IRA. They are usually utilized by small businesses or self-employed individuals who may be unable to offer a 401(k) or other savings plan.
  • SIMPLE IRA – The Savings Incentive Match Plan for Employees IRA allows both employers and employees to make contributions similar to a 401(k) plan, but with lower costs.


401(k)s are amongst the most common retirement plans. These plans tend to be sponsored by an employer and oftentimes even have benefits offered by the employer, such as a contribution match. A little tip: when you change jobs, consider rolling over your 401(k) plan to a different eligible plan as you likely will no longer benefit from your old employer’s plan.

401(k) plans also tend to have a higher contribution maximum compared to an IRA, with the 2023 maximum being $22,500. This is up $2000 from 2022 as the maximum contribution amount is also based on inflation.

401(k) plans can include a variety of securities, including stocks, bonds, funds, and even cash. Typically you are given a list of mutual funds and exchange-traded funds (ETFs) to invest in and you can allocate your contributions however you please. It’s important to frequently assess what your 401(k) portfolio consists of and to “rebalance” your portfolio depending on each asset’s individual performance. If you notice an underperforming fund, it may be best to take down your allocation percentage or drop it entirely, and vice versa for high-performing funds.

When it comes to 401(k)’s and inflation, diversifying your portfolio to include funds that encompass a variety of inflation-meeting stocks is helpful. Additionally, rebalancing based on performance is key to maximizing performance and minimizing the impact of inflation.

When it comes to tax implications of 401(k)s, some employers offer both a Roth 401(k) and a Traditional option, similar to the previously discussed IRA. The Roth plan allows you to make contributions after taxes have been deducted from your wage. Contributions to a Traditional plan are made prior to a tax deduction, meaning taxes are due upon withdrawal from the plan.

Real Estate Investments

The final strategy we want to provide to hedge against inflation in your retirement year is the recommendation to invest in Real Estate. In the long run, the Real Estate market will generally trend upward. Real Estate has most recently skyrocketed on the inflation curve, hitting a new high of 8.9% higher than previous prices in the past year.

Purchasing an investment property (if you are able) will allow you both passive investment income in current times or could offer a big payout some years down the road. Either way, it’s an excellent layer of security from the effects of inflation.


Inflation is just one of the issues future retirees will face. With a good understanding of inflation and how it happens, as well as ways to hedge against it, you can protect yourself from the harrowing effects.

While inflation is a scary thing for all of us consumers, the truth is that retirement in the future is not going to look the same as it does today, with inflation being just one of the issues to combat. At the end of the day, with a solid investment strategy and plans to re-evaluate said strategy, inflation is something that can be managed.

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