How Can Inflation Impact Your Retirement Plan? (2023)

What Is Inflation Risk?

During your retirement years, your money will not stretch as far as it did when you first left the workforce. This is due to inflation, the economic phenomenon that describes how prices of goods and services increase over time.

Using the Bureau of Labor Statistics’ inflation calculator, you can determine how far your money could go from year to year based on historical inflation rates. Although the calculator can’t predict the future, it’s useful to see how the value of money has changed in the past when estimating how much income you are likely to need in the future.

Plugging numbers into the calculator shows you that you would need $877.59 to have the same buying power in July 2022 as you had with $500 in January 2000.

To translate this example into retirement, let’s say you plan to live off of $50,000 a year when you retire. If we assume a regular inflation rate of 3% per year, you’ll need $77,898.37 to match the purchasing power of that $50,000 after 15 years.

Because the cost of living will increase each year after you leave the workforce, you must account for this inflation when you’re planning and saving for your retirement.

How Can Inflation Impact Your Retirement Plan? (1)

“Inflation is one of many financial risks which can never be completely avoided, only managed. Like most risks of investing (or not investing), a balanced strategy can control the severity of the impact to your finances.”

How Can Inflation Impact Your Finances in Retirement?

Inflation has soared in recent months, with consumer prices spiking by 9.1% from June 2021 to June 2022, according to a report from the U.S. Bureau of Labor Statistics. This marks the largest 12-month increase in consumer prices since the 1980s.

Even a low rate of inflation can significantly erode purchasing power in the long run, and retirees experience inflation at higher rates than other consumers. Retirees tend to spend more of their money on services and products heavily impacted by inflation, such as healthcare, housing and food.

Annuity.org expert contributor Thomas Brock says there’s another factor that complicates inflation for retirees. “The problem is most significant for people living on fixed incomes, which is typically the case for retirees. Over time, inflationary pressure can diminish the purchasing power of their income.”

Inflation in the 12 months from July 2021 to July 2022 has averaged about 8.5%, according to the most recent data from the Bureau of Labor Statistics. Viewed in terms of the purchasing power of the dollar, this means that $100 last year is now worth only $92.17.

If this high rate of inflation continues, the purchasing power of retirement savings could erode even further. That same $100 would be worth $44.23 after 10 years and just $19.56 after 20 years.

Expand

Health care spending for seniors is estimated to be three times higher than for working adults and five times higher than for children.

In addition, retirees spend higher portions of their income on housing, which rises in cost at a slightly faster pace than other goods and services.

(Video) How inflation impacts your retirement plan | Fortune Explains

How Can Inflation Impact Your Retirement Plan? (3)

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Inflation and Your Savings

When you’re putting money away for a long time — such as saving for retirement — you must account for how the purchasing power of your money will decrease due to inflation.

Putting money into a savings vehicle like a savings account or a certificate of deposit (CD), your money earns interest for as long as it remains in that account. The longer you keep the money in the account without withdrawing it, the more interest your savings will earn.

However, interest rates for these bank products are too low to keep pace with inflation. The average interest rate on savings accounts in August 2022 was just 0.13%, and the average interest rate on two-year CDs was only 0.51%.

In these accounts, your savings won’t grow nearly as fast as inflation, resulting in a significant reduction in purchasing power.

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Planning for Retirement With Inflation in Mind

The good news is that most retirees don’t have their savings stuffed in low-yield savings accounts. The money likely is invested in a way that allows it to grow so that it may be keeping up with inflation already, thereby mitigating one of the most significant risks in retirement.

However, inflation doesn’t stay the same from year to year, and it’s impossible to predict when prices might spike dramatically as they have in 2021 and 2022. It’s worth considering how you might better prepare your retirement savings for the effects of unusually high inflation.

(Video) How Can Inflation Affect My Retirement Plan? Fisher Investments Answers Your Retirement Questions

How To Track Inflation Rates

Although inflation has increased at an unusually brisk pace in recent years, financial advisors generally suggest assuming an annual 3% inflation rate when planning for retirement. Prior to the pandemic, this was a slightly higher rate than what the government typically calculated as the actual inflation rate each year.

The Bureau of Labor Statistics (BLS) tracks monthly average prices of consumer goods to establish the current Consumer Price Index (CPI), which the bureau defines as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

The change in the CPI from one period to another is what determines the rate of inflation. The BLS traditionally tracks the CPI of one population group, urban wage earners and clerical workers, as a measure known as the CPI-W.

CPI-W measurements are used to dictate the cost-of-living adjustments (COLA) made by the Social Security Administration. But, because their spending is more centered on goods and services with more rapidly increasing costs — primarily health care and housing — retirees face cost-of-living increases that tend to exceed the national averages reflected by the CPI-W.

Because of this, the BLS created an unpublished, experimental inflation measure specifically for older Americans, known as the CPI-E. The CPI-E reflects estimated spending patterns of Americans ages 62 and older from December 1982 to the present and varies slightly from the CPI-W.

Historical Average Annual Rate of Inflation: CPI-W vs. CPI-E

YearCPI-WCPI-E
2022 (1st Half)9.0%5.1%
20215.3%4.3%
20201.2%1.4%
20191.9%1.9%

Investment Options

One way to keep inflation from affecting your ability to maintain your lifestyle in retirement is to invest in assets that keep pace with inflation or even surpass it in growth.

But there is usually a cost associated with any investment that has the potential for higher returns. It might be the fact that the investments, such as stocks, carry higher risks of losing value. Or it could be that the cost of the investment is higher than the same investment without inflation protection.

Examples of investments that may protect against inflation include annuities, inflation-protected treasury securities, Series I Savings Bonds and real estate.

Annuities are an insurance product that converts a lump sum premium into a stream of income payments. Some annuities are inflation-adjusted, which means their payment amounts will increase according to increases in the CPI. Most inflation-adjusted annuities have a limit on how much the amount can increase each year, known as a cap.

Treasury Inflation-Protected Securities (TIPS) are issued by the federal government. Payouts rise with inflation as measured by the Consumer Price Index. These bonds pay interest at a fixed rate two times each year. The principal may be increased if the CPI warrants it, with the interest rate applied to the higher principal.

(Video) How Inflation Affects Your Retirement | Phil Town

Besides TIPS, the Treasury’s Series I Savings Bonds are another great product to invest in for inflation protection. “Essentially, we’re talking about a completely risk-free investment issued directly by the U.S. Treasury Department,” says Brock. “You can’t lose your principal investment on these bonds, and you are hedged against inflation. All things considered, there is no other investment in the world that currently offers a comparable risk-adjusted return.”

According to an article from EquityMultiple, experts say real estate investing can be a hedge against inflation because the scarcity of real estate gives it intrinsic value. Demand for real estate doesn’t decrease as inflation increases, and the ability to generate rental income from the property also increases at a rate that compensates for inflation. For these reasons, real estate has proven to be a reliable hedge through historic periods of inflation.

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Last Modified: December 5, 2022

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How Can Inflation Impact Your Retirement Plan? (4)

Written ByJennifer SchellFinancial Writer

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10 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Barnett, R. (2022, July 16). Is Inflation Costing You More as a Retiree? Retrieved from https://www.kiplinger.com/personal-finance/inflation/604933/is-inflation-costing-you-more-as-a-retiree
  2. Calculator.net (2022). Inflation Calculator. Retrieved from https://www.calculator.net/inflation-calculator.html
  3. EquityMultiple. (2022, August 18). How Private Real Estate Serves as a Hedge Against Inflation. Retrieved from https://www.equitymultiple.com/blog/effects-inflation-real-estate-investing
  4. Federal Deposit Insurance Corporation. (2022, August 15). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html
  5. U.S. Department of Labor. (2022, September 7). CPI for Urban Wage Earners and Clerical Workers (CPI-W). Retrieved from https://data.bls.gov/
  6. U.S. Department of Labor. (2022, August 15). Consumer Price Index Unchanged Over the Month, Up 8.5 Percent Over the Year, in July 2022. Retrieved from https://www.bls.gov/opub/ted/2022/consumer-price-index-unchanged-over-the-month-up-8-5-percent-over-the-year-in-july-2022.htm
  7. U.S. Department of Labor. (2022, July 18). Consumer Prices Up 9.1 Percent Over the Year Ended June 2022, Largest Increase in 40 Years. Retrieved from https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm
  8. U.S. Department of Labor (n.d.). Consumer Price Index. Retrieved from https://www.bls.gov/cpi/
  9. U.S. Department of Labor (n.d.). CPI Inflation Calculator. Retrieved from https://www.bls.gov/data/inflation_calculator.htm
  10. U.S. Department of the Treasury. (2022, July 19). Treasury Inflation-Protected Securities (TIPS). Retrieved from https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm
(Video) How does inflation impact your retirement plan?

FAQs

How inflation affects your 401k? ›

When inflation exceeds a 401(k)'s rate of return, the portfolio's purchasing power decreases. This means the individual will technically be able to purchase less items than before, as the increase in return did not make up for the increase in cost of living expenses.

What happens to pensions when inflation is high? ›

Whether or not your pension keeps up with inflation depends on the current rate and how your investments perform. If inflation hits 12%, for example, your pension would have to grow by more than this amount simply to keep up with the cost of living.

Does retirement increase with inflation? ›

Past performance is no guarantee of future results.

And when inflation rises, interest rates should follow, so assets like newly issued Treasuries and bond funds should start paying higher interest rates over time. Social Security benefits may also rise with inflation. But that's not all.

How can I protect my retirement savings from inflation? ›

5 ways to protect your pension income against inflation
  1. Retire later. Waiting a bit longer than you planned to retire can mean you avoid retiring at a time of high inflation. ...
  2. Use up cash ISAs first. ...
  3. Withdraw less. ...
  4. Stay invested – but look at where. ...
  5. Add to your pension.
23 May 2022

Why is my 401k losing money right now 2022? ›

One reason is that the stock market is simply going through a down period. Another reason your 401(k) may be losing money is that you have invested in a specific company or industry that is not doing well. Finally, your 401(k) may lose money because of fees.

How do I protect my 401k during inflation? ›

Stay Invested in Stocks

Investing — or remaining invested— in stocks during retirement can help your retirement savings keep up with inflation. There is no guarantee your stocks will outpace inflation, but “safe stocks” have historically performed well over long periods of time.

Will my pension go up if interest rates rise? ›

Pensions. Your pension pot might grow if interest rates rise. This is because a proportion of many pension funds are invested in bonds, and the value of bonds could increase if interest rates rise. Those looking to take out an annuity could also benefit from a higher interest rate.

How much do I need to retire including inflation? ›

How does inflation impact my retirement income needs? Inflation can have a dramatic effect on purchasing power. For example, if your current income is $50,000 per year and you assume a 4.0% inflation figure, in 30 years you would need the equivalent of $162,170 to maintain the same standard of living!

Why are retired people hurt by inflation? ›

Retirees often turn to their savings to get them through retirement. But when inflation occurs, the purchasing power of your savings diminishes, leaving you to withdraw larger amounts of savings to cover your costs of living, effectively shrinking the lifespan of your retirement savings.

Who benefits from inflation? ›

1. Collectors. Historically, collectibles like fine art, wine, or baseball cards can benefit from inflationary periods as the dollar loses purchasing power. During high inflation, investors often turn to hard assets that are more likely to retain their value through market volatility.

What is the safest place to put retirement money? ›

The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.

Where should savings be when inflation is high? ›

Invest to give your money a greater potential to grow

Investing your money over the medium to long term may give you a better chance of beating inflation. That's because investments, such as funds, shares, bonds and other assets could give your money greater potential to increase in value over time.

Where should retirement money be placed during inflation? ›

For the money that will provide a retiree with their income in the next one to five years, it is wise to take less risk, as a short-term loss could have catastrophic consequences. This is when money is best invested in options like bank CDs, fixed annuities and short-term fixed income funds.

How do I protect my 401K from the stock market crash 2022? ›

Diversify Your Portfolio

Having a diversified 401(k) of mutual funds that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn. How much you choose to allocate to different investments depends in part on how close you are to retirement.

Are retirement plans losing money in 2022? ›

The average individual retirement account balance also plunged 25% year-over-year to $101,900 in the third quarter of 2022.

What is a reasonable rate of return on retirement investments 2022? ›

The average 401(k) rate of return ranges from 5% to 8% per year for a portfolio that's 60% invested in stocks and 40% invested in bonds. Of course, this is just an average that financial planners suggest using to estimate returns.

How do you handle retirement with rising inflation? ›

Here's how it works: In the first year of retirement, withdraw 4% from your IRAs, 401(k)s and other tax-deferred accounts (which is where most workers hold their retirement savings). For every year after that, increase the dollar amount of your annual withdrawal by the previous year's inflation rate.

Are 401k losing money right now? ›

“Today, those assets have shrunk on average to about $101,000. In other words, the average 401(k) plan is down about $34,000 — more than 25% in less than one year!” Pension funds are down, too. At the beginning of 2022, pensions in the United States have $27.8 trillion in assets, Moore and Antoni noted.

Should I keep putting money in my 401k right now? ›

If your retirement timeline and cash reserves allow it, continuing to invest now could reap big rewards later. And seeing big, unrealized gains in your 401(k) is probably the best way to get that awesome feeling about investing.

How high will an annuity GO 2022? ›

Latest annuity rates

The 15-year gilt yields decreased by -37 basis points to 3.87% during October 2022 with providers of standard annuities increasing rates by an average 3.68% for this month and we would expect rates to fall by -4.68% in the medium term if yields remain at current levels.

Is it better to put money in savings or pension? ›

Pensions have many important advantages that will make your savings grow quicker. A pension is basically a long-term savings plan with tax relief. Getting tax relief on pensions means some of your money that would have gone to the government as tax goes into your pension instead.

What is a realistic pension growth rate? ›

So 7% (4% real return + 3% inflation) is a reasonable average pension growth rate based on historical returns.

What is the average 401K balance for a 65 year old? ›

While the 401k is one of the best available retirement saving options for many people, just 41% of workers contribute to one, according to the U.S. Census Bureau.
...
Average 401k by Age (Vanguard)
AGEAVERAGE 401K BALANCEMEDIAN 401K BALANCE
65+$255,151$82,297
5 more rows
7 Sept 2022

What is the 5% rule for retirement? ›

As an estimate, aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, then adjust that amount every year for inflation.

What is a good monthly retirement income? ›

A good retirement income is about 80% of your pre-retirement income before leaving the workforce. For example, if your pre-retirement income is $5,000 you should aim to have a $4,000 retirement income.

Who is hurt most by inflation? ›

Inflation hurts poor people and those on fixed incomes the most. Inflation helps borrowers and investors in stocks, real estate, and commodities.

What is the number one concern for retirees? ›

Paying for health care

Health care costs are the top retirement concern for Americans. According to the survey, 28 percent of people are worried their medical expenses will be in too high.

What should I invest in during inflation? ›

Here are some of the best TIPS and commodities funds for high inflation:
  • Vanguard Short-Term Inflation-Protected Securities Index VTAPX.
  • Vanguard Short-Term Inflation-Protected Securities ETF VTIP.
  • Schwab U.S. TIPS ETF SCHP.
  • Pimco Commodity Real Return Strategy PCRAX.
10 Nov 2022

Which people are most likely to gain during inflation? ›

People who have to repay their large debts will benefit from inflation. People who have fixed wages and have cash savings will be hurt from inflation.

How do you make money from inflation? ›

Less expensive tangible assets that do well during inflation include many types of commodities. Agricultural commodities like wheat, corn, soybeans, livestock and timber are among such commodities. Industrial metals like nickel, copper and steel also tend to do well during inflation.

What is the cheapest and safest state to retire in? ›

Michigan ranks as the most affordable state to retire in 2022, according to a recent Bankrate analysis. This is due to a low cost of living and light tax burden for residents.
...
Here are the seven most affordable states to retire, according to Bankrate:
  • Michigan.
  • Tennessee.
  • Missouri.
  • Mississippi.
  • Kentucky.
  • Oklahoma.
  • Georgia.
31 Aug 2022

Should a 70 year old be in the stock market? ›

In addition to Social Security benefits, it's a good idea to consider investing as an additional income stream. It's never too early (or late) to safely invest and offset the cost of living, long-term care, or expensive hobbies.

What to do with your cash if you're retired or retiring soon? ›

Bottom line. As retirement creeps closer and closer, one of the best thing you can do with some of your money is to put it somewhere safe and accessible. High-yield savings accounts and short-term bonds allow your cash to grow with low risk, plus TIPS help to hedge rising inflation.

What assets are best during inflation? ›

Commodities like gold, oil, and even soybeans should increase in price along with the finished products that are made with them. Inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS), tend to increase their returns with inflationary pressures.

Do you lose money in savings due to inflation? ›

Any time your savings don't grow at the same rate as inflation, you will effectively lose money. If you are a retiree living on your savings, you can't keep up the same standard of living if inflation cuts into your purchasing power with every passing year.

Does inflation destroy the real value of savings? ›

However, when inflation becomes difficult to control, prices increase at an unsustainable rate (runaway inflation or hyperinflation, think Zimbabwe), the purchasing value of money and the real value of savings and pensions are destroyed.

Should you hold cash during inflation? ›

Because there is no chance of a decline in value, “cash is the best option, even if inflation is a risk factor,” she says.

What happens to my 401k during inflation? ›

A 401(k) plan is a tax-advantaged retirement plan that can be funded with employer and employee contributions. Inflation is characterized by an extended period of rising consumer prices for goods and services. When inflation exceeds a 401(k)'s rate of return, the portfolio's purchasing power decreases.

What happens to 401k when interest rates rise? ›

If you own mutual funds that invest in bonds inside your 401(k) plan, a rise in interest rates will likely lower their share price and net asset value. On the other hand, the income of these funds would likely rise over time as they add new holdings paying higher rates to their portfolios.

What will happen to my 401k if there is a recession? ›

A 401(k) plan is a workplace retirement plan that allows workers (and their employers) to set aside tax-deferred money for retirement. During a recession and leading up to one, you're likely to see the value of the investments in your 401(k) decline.

What should I do with my 401K in 2022? ›

In 2022, most 401k will provide you with multiple investment options in stock, fixed-income mutual funds, and ETFs. Furthermore, most employers offer a 401k match for up to a certain percentage. In most cases, you must participate in the plan to receive the match.

Are retirement accounts losing money in 2022? ›

The average individual retirement account balance also plunged 25% year-over-year to $101,900 in the third quarter of 2022.

Is it better to retire when interest rates are high? ›

Cons of Higher Interest Rates for Retirees

Interest rates typically rise to control inflation. So, if interest rates are rising, the growth of all your investments will be further eroded by higher inflation. But moving savings to investments that perform better from high interest rates can minimize the damage.

Are higher interest rates good for retirement? ›

Higher interest rates are good for our cash and checking accounts but are not always good for pension holders. Rising interest rates have an inverse relationship to a pension's lump-sum value. As interest rates increase, the value of a pension holder's lump sum could decrease.

What is a good interest rate for 401k? ›

Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions.

Should I move my 401k to bonds 2022? ›

The Bottom Line. Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. But doing so could potentially cost you growth in your portfolio over time.

How should we prepare for a recession in 2022? ›

Steps Americans are taking to prepare for a possible recession
  1. Delaying major purchases like home or car. 34%
  2. Paying down debt. 29%
  3. Planning to reduce holiday spending. 28%
  4. Allocating more income to savings. 24%
  5. Staying in a job they don't enjoy. 14%
13 Oct 2022

Should I take my retirement out of the stock market? ›

If you're retired, don't take withdrawals from your stock funds in a bear market unless you have no other choice. You won't have income to cover your losses. And if your stock fund is down 15 percent and you withdraw 4 percent, your account will be down 19 percent. Withdrawals in a bear market just make things worse.

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