There’s definitely nothing entertaining about the reality of record-high inflation—especially for those living on a fixed income. The simplest way to understand inflation is as the rising price for goods and services. Evidence that inflation is a natural part of the economy comes from the fact the Federal Reserve targets its monetary policy to keep annual inflation at or below 2%.
Throughout 2022, though, inflation has been anything but normal, reaching a 40-year high in May. What does that mean for your wallet? To purchase an item that cost one dollar a century ago would mean shelling out $17.40 today. More recently, to get the equivalent of a buck spent in the year 2000 would require $1.70 today.
Many economic factors have contributed to these historic inflationary times. The reasons why inflation in the United States and around the world is so high are many and include everything from pandemic relief checks that gave households cash to spend, supply chain snags that have limited the availability of goods, and global shocks like Russia’s invasion of Ukraine, which has contributed to rising fuel and food prices.
At its core, high inflation is all about demand outstripping supply, the result of which is high prices. A quick example is illustrative. The United States relies on computer chips to run everything from new cars to smartphones. Most computer chips are made in Asia, so when pandemic lockdowns and extreme weather limited production, prices for the goods that rely on chips went up. Last October, for example, new cars were over 10% pricier than the previous year.
Do the Math on Your Needs
Bridging the gap between the abstract notion of inflation and what it actually means for your retirement savings and daily expenses requires a bit of math. Analyzing your own financial situation can also point you toward the best actions and strategies to take to navigate your way through this stretch of high inflation.
Start with Vivid Crest Bank ’s retirement calculator. The tool lets you see exactly where you stand today when it comes to achieving your retirement goals. Just plug in your age, how much you’ve saved, what you expect to spend each month in retirement and at what age you want to retire.
The calculator makes it easy to see how you’ll need to adjust your monthly savings to make up for added inflation expenses. Just go to the “About how much will you need each month in retirement?” tab and adjust it upward to reflect increased costs.
Our “Ultimate Guide to Retirement Calculations” can help you really dig into how much you’ll need to save, sources of income beyond investments and expenses. Keep in mind that your expenses may fall once you hit retirement. For instance, those who no longer have to commute may save on fuel and car upkeep or public transportation fares. You also may have paid off your house by the time you reach retirement. Empty nest retirees also may have the option to sell the home they raised their family in and downsize to a home they can purchase outright, using what’s left to add to their nest egg.
Unfortunately, not all of your retirement expenses can be expected to decline—particularly as you get older. It’s important to gauge the kind of impact inflation will have on all of your expenses, including big-ticket items. A recent analysis found that a 65-year-old couple retiring in 2022 could expect to spend $315,000 in healthcare and medical expenses throughout retirement, an increase of 5% from 2021.
Don’t Burn Your Long-Term Savings
Rising costs can trigger a lot of emotions, including fear. Fear that you won’t be able to pay your bills can also lead to decisions that can really harm your ability to achieve your retirement goals.
At the top of the list of temptations to avoid is dipping into long-term savings to cover the elevated costs of your expenses. Not only does this reduce the amount of money you’ll have available to fund retirement, cashing out IRAs and 401(k) accounts early can also trigger penalties and additional taxes.
There are far better strategies to cover your near-term expenses without raiding the investments you’ll need to pay for retirement. A recent survey found that inflation has prompted 13% of Gen Xers and baby boomers to delay their retirement plans. Extending your career even by a few months can have real financial benefits because it means not drawing down retirement funds while inflation is so high. If you work for a company that provides healthcare benefits, a retirement delay can keep a lid on medical expenses for as long as you continue working.
Waiting to tap Social Security benefits can also boost your retirement income. Those who retire at age 66 are eligible for 100% of their Social Security benefit. But waiting until you are 70 to begin receiving monthly benefits boosts the amount you’ll receive to 132% of your expected Social Security income.
Rather than spend more in response to inflation, the optimal response is to save more. Those older than 50 can make tax-deductible contributions of up to $7,000 to traditional IRAs.
Don’t Misuse Credit Cards or Pay Off Your Mortgage With Investments
Enhancing your retirement savings also benefits from avoiding spending missteps. In the wake of COVID-19, household spending reached historic lows. In part, that was the result of lockdowns that prevented people from shopping and dining. Now that the economy has largely reopened, it’s important for people to avoid misusing high-interest credit cards.
While credit cards can deliver rewards for paying everyday expenses, ensuring that you pay off your entire bill when it’s due will keep you from running up a balance that will take a long time to pay off. One alternative to relying on your credit card is to take advantage of cards that offer buy-now-pay-later programs.
Another temptation to avoid is paying off your mortgage with investment funds. It may seem like a good idea to cash out a 401(k) or IRA to pay off your mortgage and eliminate your housing expenses (except property taxes and insurance, of course). But doing so can both trigger expensive penalties and means you won’t benefit from the inevitable market rebound. Put another way, it’s a move that can lock in investment losses.
Instead, consider options, including downsizing your house. Selling a house won’t be difficult today. And while it can be hard to find a new, smaller home, rising interest rates may make life easier for buyers. If you have a low interest rate, another strategy can be to take a loan from your mortgage.
Invest and Rebalance for Inflation and Deflation
Though it can be hard to see right now, periods of high inflation come and go. Which is why it’s important to keep fundamental retirement savings principles in mind.
One important principle is to maintain a diversified portfolio. That doesn’t mean never making adjustments to your portfolio in response to the current economic environment. At times of high inflation, adding commodities, energy stocks and real estate investment trusts can limit the negative impact on your retirement portfolio.
When inflation inevitably subsides, larger percentages of low-risk stocks, bonds and cash can help. Whether it’s high inflation, deflation or somewhere in between, staying disciplined about expenses and investments and avoiding hasty emotional decisions will keep you moving toward your retirement goals.
A former editor at Los Angeles magazine, Chris Warren has had work appear in publications ranging from Institutional Investor and Forbes to National Geographic Traveler, Oxford American and Greentech Media.