Until recently, Inflation wasn’t something most people close to retirement stressed out about. However, even before the rocketing inflation we have experienced, it could pose a significant threat to your financial livelihood. Inflation plays it’s part in increasing overall prices. On some level, you could say it’s the illusion of progress. While you may get pay increases at your job, the costs of goods and services may make that increase in pay meaningless.
The inflation rate will considerably impact how much value your retirement dollars hold on an individual level. With time, it can take a toll on your retirement savings. It is crucial to understand how inflation can threaten your retirement plans. That is why the need to strategize to ensure that your assets last through later years is so crucial.
Here’s everything you need to know about the effects of inflation on your retirement, methods of counteraction, and the impact of stagflation.
The Effect Of Inflation On Your Retirement
The main concern for retirees is that inflation reduces their buying power. Even if inflation remains low, retirees will be affected the most as they need to spend money on high-priced services such as healthcare. Low inflation poses another problem for retirees as the Social Security Administration (SSA) doesn’t issue a yearly cost-of-living increase for those receiving benefits. In short, you want a little inflation but not too much.
Healthcare isn’t the only concern for retirees. Other expenses such as housing, traveling, and supporting adult children can be affected. Even for retirees with the best-laid plans, inflation is an uncontrollable factor that complicates retirement planning. It is the enemy of fixed income and eats away the value of those Social Security checks, 401(k) savings, and pension payments. So what can you do?
What Retirees Can Do To Curb Inflation’s Side Effects
1. Save When You Can
We’re sure you’ve heard this before, but some things need to be said as a reminder. Saving money will get you a long way. Don’t make any risky investments that will backfire. The most crucial step is knowing your current financial standing and setting your future goals accordingly. To live an ideal life post-retirement, you must ask yourself how much you’ll need to save to afford this preferred lifestyle minus the inflation. Once you gauge the price, you can start saving consciously.
2. Maximize Your Retirement Accounts
Fully fund your 401(K). It is one of the most powerful savings tools, and individuals nearing retirement must seriously consider investing in their 401(K) as soon as possible.
Raise your retirement contributions to the highest amount acceptable in your IRAs and/or other retirement procedures. Consider account consolidation of your IRAs into a single institution as you near retirement.
3. Estimate Your Retirement Expenses
While daily commute and clothing costs may decline with time, health, travel, kids’ education, and leisure activities are likely to increase, even more so if you currently enjoy these.
Healthcare is a huge part of retirement planning and expense. It is critical to think about buying long-term care insurance, or if you have a health savings account, consider putting in the maximum contribution.
4. Cut Down On Your Debt
Start cutting down your debt by fast-tracking your credit payments and quickly pay off your home loan before you retire. As for the new debts, consider using cash for your major purchases to reduce your new credit card debt.
By restricting new debt and decreasing existing purchases, you can quickly reduce the sum of retirement income spent on interest payments.
5. Let Social Security Help
Social Security is a significant part of most individuals’ retirement planning. A huge number of retirees rely on Social Security for over half of their retirement income. You can maximize these credits by waiting for the right time before drawing benefits. All individuals and married couples must optimize their Social Security benefits. In addition, you must keep an eye on your spending before and after retirement to know where most of the money is going.
6. Stagflation And Retirement
Stagflation could be a growing concern for retirees. When there is high inflation, high unemployment, and stagnant demand in the economy, it may be time to decrease your risks. Stagflation will delay making large purchases such as buying real estate. Retirees should immediately assess the risks they are taking with their investments and see whether they can afford them or not. If not, action needs to be taken.
The second thing to look at would be income taxes. Retirees paying taxes on their Social Security benefits should think of ways to reduce these without compromising their lifestyle. Lastly, retirees should divide their retirement money into segments to secure themselves. These segments can range from cash you’ll spend in the next five years, savings for the years ahead, money to put in annuities, etc.
However, a long-term financial plan is ideal for securing your finances from stagflation. If you’ve been saving, cutting down on your costs, and investing in the right places, it should not impact your retirement planning. Nonetheless, if you have aggressive investments and a poorly diversified portfolio, it may be time to think them over and reduce your risk.
The Bottom Line
The biggest mistake that most individuals make is to think about retirement when they hit fifty. While your retirement may seem years away, it is crucial to start planning at an early age and carefully while keeping inflation and if the economy hits stagflation in mind. It is vital to set realistic goals to avoid any compromises later. Along with retirement planning, it is essential to act upon them. Action combined with the counteractions mentioned above can make your retirement smooth.