Retirement Planning? Consider Inflation

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During periods of high inflation, increasing prices on everyday essentials like groceries, gas, and utilities can take a bigger bite out of your monthly budget. While many of us can feel the immediate pinch of rising costs when out shopping, we may not be thinking about how inflation can impact our retirement savings.

Because inflation can increase the general cost of living and decrease the value of your dollars over time, it’s an important consideration in retirement planning. Let’s go over a few tips to keep in mind as you work toward your retirement goals.

Estimate how much you need to save for retirement 

Before calculating inflation’s potential impact on your retirement funds, let’s start with how much money you’ll likely need to save for retirement in the first place. A general rule of thumb is that you’ll need 80% to 100% of your pre-retirement income for every year you’re retired.


A general rule of thumb is that you’ll need 80 – 100% of your pre-retirement income for every year you’re retired.


Let’s say you retire at 65 with an annual income of $150,000. For this example, we’ll use 90% as the percentage of your income you’ll need in retirement. Take that $150,000, multiply it by 0.90, and you’ll get $135,000 as your annual retirement income. If you live to 90, this would come out to well over $3 million!

Another thing to keep in mind is that your income and spending can change before you retire – lifestyle inflation along with traditional inflation, for example, can affect your budget. So consider checking your progress every few years to see if you’re still on track to have enough set aside for the future.

Good to know: There are online retirement calculators that could help you crunch the numbers. Some calculators consider several variables (like the age you plan on retiring and your projected monthly expenses) to suggest a dollar amount to aim for. They may also factor in inflation. If you need help, you may want to consider working with a financial advisor who can help you determine an appropriate retirement savings target and put together a plan.

Consider how you’re saving for retirement

Retirement accounts, like a 401(k) and an IRA, are probably one of the first places you’ll put money aside for Life 2.0.

These accounts, however, may only be part of your investment strategy because there are annual contribution limits. For example, if you have a 401(k), you’re only allowed to contribute up to $23,000 in 2024 (for those age 50 and older, you may be able to make additional “catch-up” contributions). And for IRAs, the maximum annual contribution limit for 2024 is $7,000 (or $8,000 for those 50 and older).

If you’ve reached the maximum annual contribution limits for your 401(k) plan and/or IRAs and would like to invest more money, you may consider additional investment options. For example, some individuals may consider opening a brokerage account.

A quick note about investing: Keep in mind that investing involves risk. There are no guaranteed or predictable returns. Potential market volatility means your investments could make money or lose money. You could even lose your principal, which is the amount of money you originally invested. Learn more: Saving vs. Investing – What’s the Difference?

Good to know: Your investment strategy may change as you get older. As you approach retirement, you may see recommendations to put relatively less in stocks and more in investments whose value tends to go up as inflation rises. These could include Treasury Inflation Protected Securities (TIPS) and I Bonds. Don’t hesitate to speak with a financial advisor if you have questions about your investment strategy or what kind of investments may make the most sense for you.

Consider health care costs when you’re retired

Medical care is one of those things that doesn’t really seem to go on sale – ever see a 2-for-1 offer on X-rays? And when it comes to retirement, health care costs are an important expense to consider because the older we get, the more money we tend to spend on it.

In addition to taking up more of our budgets, medical costs also tend to get more expensive in general. Health Affairs, a peer-reviewed health policy journal, predicted in 2020 that out-of-pocket health costs will increase about 4.1% between 2021 and 2023 – for everyone, not just older Americans. And it doesn’t include inflation.

But a little planning may be able to help soften health care’s impact on your retirement funds.

Unlike investing, where your goal is to get a high return, the health care tips here are more about finding ways to save money outright (such as through an HSA) or getting help with paying for costs (think Medicare). Here are some consider: 

1. Max out HSA contributions if you have one: This may not be an inflation hedge per se, but a Health Savings Account can help you set aside money to use on certain health care costs during retirement. Money in HSAs earns tax-free interest and you won’t pay taxes on withdrawals as long as you use the funds for approved health care expenses.

2. Stay on top of Medicare: Medicare is federal health insurance you can sign up for once you turn 65. It can be used in conjunction with other health insurance and can help cover medical costs. However, it’s important to enroll when you first become eligible because premiums may be higher if you enroll late.

3. Explore long-term care insurance (or alternatives) long before you retire: This tip may not directly address inflation, but it could be a way to stretch your funds. Long-term health insurance and related types of coverage can help pay for care that could pop up as you age, like adult daycare or staying at an assisted living facility, among others. Considering long-term health coverage early is important because the cost rises as you get older. If you wait too long to apply (think late 70s early 80s), you may not be able to get coverage.

Consider how inflation could affect other goals

Although we’ve been focused on retirement, the reality is that inflation affects the value of all of your money. This includes money you’re saving for near-term goals, like buying a second home or your kid's college tuition. It could also impact longer-term goals like setting aside funds for your family or a favored charity. To get ahead of inflation, you could use different types of savings strategies like we described here. You could even try to build in 2% to 3% inflation gap into your targets. Working with a financial advisor is also a good idea – they can work with you to review your overall financial picture and help put together a retirement plan that’s tailored to you and your goals.

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Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.