Investing 101

How inflation impacts retirement savings and investments

Inflation can affect retirement savings and investments by reducing the purchasing power of money over time. As prices increase, the value of fixed-income investments and savings decreases, making it important to consider assets that can keep pace with inflation. Understanding inflation's impact can help in making informed decisions to help protect and grow retirement funds.

Key takeaways

  • 01

    Align your strategy with inflation trends

    Inflation has the potential to decrease the purchasing power of your retirement savings over time. To mitigate this risk, consider investing in assets that typically outpace inflation, like stocks and real estate.

  • 02

    Diversify to protect against inflation

    By spreading investments across various asset classes, you may reduce the risk of inflation eroding your savings. Consider including inflation-protected securities and commodities in your portfolio.

  • 03

    Plan for potential increased retirement costs

    It's important to factor in higher expenses when planning your retirement budget. Adjust your savings goals and withdrawal strategies to account for potential inflation impacts.

Navigating inflation

What is inflation?

Inflation is a continued increase in the cost of goods and services. If those increases in prices are large and sustained, it can greatly erode the purchasing power of your savings. That means you get less for your dollar. On the other hand, low levels of inflation can also be considered harmful by economists as it can slow growth and depress wages, sometimes even leading to a recession.

When economists talk about inflation, they typically think of it in two ways: expected and unexpected inflation. Expected inflation is just that, the normal level of inflation we’d expect to see. While there is no official rate deemed normal, policy makers and economists generally accept that a healthy target is at or slightly below two percent.1 Unexpected or shock inflation can be loosely defined as inflation above the expected level, especially if it occurs within a relatively brief period.

It can be hard to predict what levels of inflation will occur in the future since it’s impacted by a variety of factors, but there are actions you can take to help combat it. That may include investing your savings and being mindful of your goals.

Ways to help preserve your retirement savings against inflation

There are ways to help protect your long-term savings from the effects of inflation. First, consider whether your savings should be invested as opposed to just kept in a savings account. Funds that are kept in cash will likely decrease in relative value over time. Accounts or investments with low interest and returns may not offer much benefit either.

That’s why it’s important to examine the “real return” on investments. This is the rate of return minus the rate of inflation to quantify the increase in value of your savings. Investing in assets like equities and alternatives can potentially help as they may generate higher returns compared to other strategies. These gains can help offset inflation.

In periods of high inflation, considering certain inflation hedging assets may also be beneficial. That’s especially true as you get older and closer to retirement. But know that returns on most commonly invested asset classes in addition to increases in wages will often outpace inflation. It’s a consideration that younger investors might keep in mind.

When it comes to investing for retirement, a target date fund can help manage inflation concerns and appropriately adjust exposure to different asset classes. A financial advisor can also provide advice that is suited to your specific needs and concerns related to inflation.

How can inflation impact your retirement goals?

During periods of higher inflation, you likely feel the impact on trips to the grocery store or at the gas pump. Increased costs can strain your budget today, and also impact the amount you’ll need to save for tomorrow.

The good news? Investing your savings could help you beat inflation and preserve their value and growth. You may want to consider adjusting your savings goals as well to reflect the changing economic landscape. That may mean aiming to set aside extra savings for retirement if you anticipate needing more. Just as your budget today changes in periods of high inflation, so could spending needs in the long-term for your desired standard of living.

Wrap up

Frequently asked questions

  • Inflation can reduce the purchasing power of your retirement savings over time. This means that the same amount of money will buy fewer goods and services in the future. To counteract this, it's important to plan for inflation in your retirement strategy by considering investments that typically outpace inflation, such as stocks and real estate.

  • Retirees can protect their savings from inflation by diversifying their investments. This includes spreading investments across various asset classes like stocks, real estate and inflation-protected securities. Regularly reviewing and adjusting your investment strategy can also help mitigate the impact of inflation.

  • Inflation can significantly increase the cost of living during retirement, affecting expenses such as healthcare, housing and daily necessities. It's important to factor in potential inflation when planning your retirement budget to ensure you maintain your desired lifestyle.

  • Inflation can be particularly challenging for retired individuals because they often rely on fixed incomes from sources like pensions, savings and Social Security benefits. Unlike those who are still working and may receive salary increases that keep pace with inflation, retirees' income may not adjust adequately to rising costs. This means that as prices for goods and services increase, the purchasing power of their income decreases, making it harder to maintain their standard of living. Additionally, healthcare costs, which tend to rise faster than general inflation, can further strain retirees' finances.

Want to learn more about saving for retirement?

Saving for retirement can be complicated – but it doesn’t have to be. Arm yourself with the information you need to make the best decisions for your financial future.
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