Understanding the Impact of Inflation on Retirement

Understanding the Impact of Inflation on Retirement

You’ve likely heard the term inflation in recent years as the U.S. and global economies have been impacted by conflicts overseas, the job market, and the COVID-19 pandemic. While you probably noticed an increase in the price of goods and services, you may be wondering what is happening and how it will impact your future financial snapshot.

Inflation occurs when the cost of producing or offering goods and services surpasses the purchasing power of money. As inflation goes up, the power of money decreases and vice versa. Inflation can be impacted by a variety of factors, and impacts consumer earning and spending in return.

While inflation ebbs and flows, you may wonder if it will have an impact on your retirement funds – and the short answer is yes. T. Rowe Price notes that rising prices create a gap between planned and required income. As the cost of goods and services increases, the money you planned for retirement may not be enough to cover expenses in a highly inflated market.

But don’t worry – there are things you can do to understand and adjust your savings to ensure you stay on a positive financial track for the future. Read below to learn how to combat inflation.

Use Retirement Calculators

Understanding different financial scenarios is an essential part of retirement planning. Adjustments to your annual contributions can make a big difference over time, making it important to review your snapshot frequently.

Slavic401k offers a library of calculators to help you plan for the future. The retirement planner calculator will help you understand what it takes to secure a solid retirement nest egg, while the contributions effects calculator will help you determine whether or not increasing your contributions to a 401(k) will negatively impact your take-home pay.

Combined, calculators like the ones noted above will help you understand where you are, where you need to go, and the adjustments needed to your everyday earnings and spending to help you get there, even with inflation top-of-mind.

Adjust Short-Term Spending and Long-Term Saving

Once you understand your overarching retirement snapshot, the next step is implementing adjustments. Review your budget for areas of overspending or under-saving. Review things like:

  • Monthly streaming subscriptions
  • Dining out costs
  • Non-essential spending
  • High-interest loans
  • Savings account totals

As you review your finances, it’s important to note areas of strength and weakness. A big part of protecting your retirement funds involves adjustments in the present.

As inflation increases, find areas where you can afford to reduce spending to enhance retirement savings. Maybe you start small by making coffee at home instead of visiting your local coffee shop every day, or maybe you consolidate debt to avoid high-interest fees that impact your spendable income. Regardless of your strategy, it’s important to plan ahead, and these adjustments will help you in the future by allowing you to reallocate funds that help you today, tomorrow, and in future decades.

If you’re not sure where to start, try the 50/30/20 budget rule. This strategy helps you divide income into different spending categories, which can keep you on track for present and future financial planning.

Asset Allocation

Maximizing your 401(k) and IRA contributions is a great way to help you prepare for inflation in retirement, but what you’re invested in is equally important. While your investment strategy will change frequently throughout your life, especially as you experience big life changes, it is important to understand the impact on those investments during periods of high and low inflation – and one way to do that is through asset allocation.

Do you have a healthy balance of stocks, bonds, and cash? Thought Leadership Director, Judith Price, with T. Rowe Price, notes that stocks have performed historically well throughout periods of inflation and because of this, believes it’s important to have stocks included in your portfolio. If you’re not sure what your asset allocation is, contact Slavic Wealth Management or your financial institution to learn more.

Inflation can change the course of your financial snapshot quickly, which is why it’s important to review your retirement savings and strategies frequently. Avoid cutting back on your retirement contributions, and instead, find ways to make your current financial situation work for you. That might include getting creative with your annual earnings or rethinking your current investment pool.

Regardless of the strategies and tactics needed, it’s important to adjust your plan when needed to avoid impacting your retirement savings goals. Use calculators, learn about the correlation between inflation and the market, and speak with your financial advisor when needed.


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