The Impact of Inflation on Retirement

Inflation hasn’t always been top-of-mind when it comes to retirement planning, especially over the last four decades when inflation was relatively low. Since inflation started skyrocketing during mid-2021, it’s become a big concern again.

When you consider your current lifestyle expenses and desired retirement expenses, you need to account for what the costs of those expenses could be over time. Inflation diminishes purchasing power over the years by increasing the costs of services that retirees and pre-retirees need.

In other words, high inflation can erode your retirement savings.

None of us can predict the future, but we can plan. Given that Americans are spending 20-30 years in retirement, it’s critical to include inflation risk in your overall planning.

Public Policy

An issue we have to contend with when it comes to inflation is actions or non-actions by banks and the Federal Reserve. Even though interest rates were raised by the Fed multiple times in 2022 and 2023, safer government-backed investments like money market funds, CDs and government bonds are still generating very low yields, not keeping pace with the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Inflation also has an impact on Social Security benefits. Among the features of Social Security is that benefits can be adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. But sometimes there is a very minor increase given, such as 2020’s 1.3%, which did not even cover the increase in Medicare premiums. The cost-of-living adjustment for 2023 was 8.7%, up from 5.9% in 2022.

Getting the most out of your Social Security benefit is extremely important for your retirement, and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, and that’s why retirement planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement, and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimate that health expenditures will reach $6.2 trillion by 2028, and national health expenditures are projected to grow 1.1 percentage points faster than gross domestic product per year on average.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2011, the Kaiser Family Foundation says average family premiums have increased 47% and workers’ contributions have increased 45%, which is quicker than wages (31%) and inflation (19%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses, then you know the impact of what higher premiums, co-pays and deductibles, as well as costs for services that Medicare doesn’t cover can do to your monthly budget. Fidelity Investments, estimating that a couple age 65 in 2022 can expect to spend $315,000 in today’s dollars for health care and medical expenses throughout retirement.

The figure doesn’t include long-term care which is not covered by Medicare.

Planning Is Key

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. There are several ways we can address inflation risk, depending on your situation.

Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk.