Over time, inflation risk can result in a loss of income, investments or value due to unexpected rising costs. Depending on your finances, inflation risk can especially have a detrimental effect on older Americans. Preparing for inflation risk within your retirement plan can help secure your financial future.
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Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.Read More
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Stephen Kates, CFP®
Certified Financial Planner™
Stephen Kates is a Certified Financial Planner™ and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.Read More
- Published: August 17, 2022
- Updated: October 7, 2022
- 5 min read time
- This page features 6 Cited Research Articles
- Edited By
What Is Inflation Risk?
Inflation risk is the possibility of a dramatic loss of income, investments or value. Inflation is influenced by production costs, demand or fiscal policy. The shift of rising costs for goods and services affects almost everything — including gas prices, housing costs, health care, food and cars. Inflation rose suddenly in June of 2022, hitting 9.1%.
Inflation is calculated by the Consumer Price Index (CPI). The U.S. Bureau of Labor Statistics has a CPI inflation calculator to help you compare buying power. For example, $1,000 in January 2010 has the same buying power as $1,367.46 in June 2022.
According to the Congressional Budget office, high inflation risk is expected to persist into 2023. Luckily, a drop is still expected, with the inflation rate estimated to hit 3.1%. However, this is still higher than the typical 2.3%.
High inflation rates present risks that can make retirement planning and overall affordability of living especially difficult for retirees. Learning how inflation risk can affect your retirement plans, and how to combat these financial roadblocks, can protect your assets and finances.
How Does Inflation Impact Your Income in Retirement?
Older Americans often depend on their savings to fund their retirement plans. While working individuals can receive cost of living adjustments (COLAs) or constant raises to keep up with inflation, retirees no longer have that option as most of their funds come at a fixed income.
There are five main factors influenced by inflation in retirement — Social Security, investments, retirement accounts and your cash or bank accounts.
Social Security offers cost of living adjustments to keep payments in line with inflation. Unfortunately, the increases have not kept pace with high inflation rates. The last increase was 5.9% in 2022, which does not cover the 9.1% inflation increase.
Although the Social Security Administration hasn’t determined the new COLAs for 2023, Kiplinger estimates that Social Security benefits will jump to 9.7% next year due to the high inflation. If this estimate is true, you should be better suited to depend on Social Security during your retirement in 2023.
Investments and Retirement Accounts
Some investments and retirement plans don’t account for future purchasing power, making their value shrink over time if inflation rises.
For example, your 401(k) doesn’t adjust to inflation. If you have a 401(k) retirement account, the amount saved won’t be worth the same as time passes. According to the U.S. Bureau of Labor Statistics $50,000 in your bank account in January 2022 has the same buying power at $6,722.44 in January 1970. As inflation rises, the value of uninvested money lowers.
How inflation affects your investments depends on the type you have. If you have an investment with a fixed rate of interest, like a certificate of deposit (CD), your purchasing power will fall when inflation increases. Other types of investments, like stocks, have held up well in the past during inflation spikes.
Cash and Bank Accounts
Depending on where you put your cash, it could keep up with inflation. So, if you place it in an account with higher short-term interest rates, it could hold its value. If you don’t invest your cash at all, it can lose its value during high inflation.
As for your bank accounts, it depends on the interest earned. For example, if inflation rates surpass the interest rate on your account — you would lose money.
How to Include Inflation Risk in Your Retirement Plan
There can be many moving parts to your retirement plan depending on your lifestyle. Whether you’re traveling abroad, moving into assisted living or aging in place at home — inflation risk can affect your future.
To include inflation risk considerations into your retirement plan, you should track inflation rates, invest your money in the right places and save accordingly. If you don’t, your money may lose value and you can face the risk of outliving your funds.
Track Inflation Rates
The U.S. Bureau of Labor Statistics has a Consumer Price Index (CPI) page with updated information. CPI is the measure of average price changes over time.
Their page data includes recent news releases, publications, charts and the latest numbers related to CPI. There’s information on cost changes for food, gasoline, shelter, energy and more.
Be sure to track the inflation rates for the items or services relevant to you. As a retiree, the CPI of new vehicles may not be relevant. Medical care services, on the other hand, would be useful to track.
Some investment options rise and fall with inflation, protecting your assets in the long run. There are specific investment vehicles that may benefit your finances, and others that may harm them during high inflation.
Everyone needs to save when planning for retirement. But you may be wondering, how do I save to keep up with inflation? Plan for a higher inflation rate and save accordingly. Underestimating would only hurt your plans later.
Your money will lose value if it sits without building interest. Consider investments that adjust to inflation with variable interest rates to help combat financial loss.
6 Cited Research Articles
- 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#:~:text=Retirees%20often%20turn%20to%20their,lifespan%20of%20your%20retirement%20savings
- Payne, D. (2022, July 14). What Is the Social Security COLA? Retrieved from https://www.kiplinger.com/article/retirement/t051-c000-s010-what-is-the-social-security-cola.html
- U.S. Bancorp Investments. (2022, August 12). Retrieved from https://www.usbank.com/financialiq/invest-your-money/investment-strategies/effects-of-inflation-on-investments.html#:~:text=Rising%20inflation%20erodes%20the%20purchasing,received%20far%20in%20the%20future
- U.S. Bureau of Labor Statistics. (n.d.). CPI Inflation Calculator. Retrieved from https://www.bls.gov/data/inflation_calculator.htm
- U.S. Inflation Calculator. (2022). Current US Inflation Rates: 2000-2022. Retrieved from https://www.usinflationcalculator.com/inflation/current-inflation-rates/
- Discover Bank. (n.d.). Inflation and Its Effects on Your Savings. https://www.discover.com/online-banking/banking-topics/how-does-inflation-affect-savings/?ICMPGN=OS-BK-FOOTCON