How to consider inflation into your retirement strategy

Inflation is back in the news, and back on the radar of many Americans for the first time in years.

For the fiscal year that ended in July 2024, the Consumer Price Index (CPI) rose 2.9% - the smallest 12-month increase since March 2021.¹ Americans are facing price increases on everything from a gallon of milk to an overseas vacation. Many who feel the sting wonder, how long will this last? What will inflation look like in the long term? And how will it affect my ability to retire down the road?

The impact of inflation on retirement

Some people fondly think of retirement as the time in which you’re no longer working. However, it’s also the time when you’re no longer earning a paycheck. To account for this, many retirees expect to live off a source of fixed income, such as Social Security or a pension, and supplement that income through sources such as annuities or earnings in an investment portfolio.

Traditionally, this was a solid strategy. However, inflation can result in people having less buying power. Simply put, your income today may not cover the same level of expenses as it did last year.

The retirement risk that inflation poses

During heightened inflation, when earnings stay the same and expenses grow, people should revisit their budgets. The logical answer is to either reduce costs or increase income, but for retirees, there is no boss to ask for a raise. Instead, the temptation is to take more money from your investment portfolio. This can be tricky because you don’t want to take out too much and risk not having enough for your latter years. And if the market falls into a recession, you may be impacted further.

Consider inflation in your retirement strategy now

Until recently, inflation was an afterthought for most people. For example, in the United States, during the thirty years from 1994 to 2024, the monthly average inflation rate was 2.3 percent, with only four brief spikes to five percent during that time.² Meanwhile, as people devised their retirement strategy, they factored in variables such as desired lifestyle in retirement, projected longevity, their tax bracket and more. Various inflation scenarios should also be added into overall retirement strategies as well.

A financial professional can help

In 2021, Guardian’s Study of Financial and Emotional Confidence revealed that people who feel the most confident about their long-term financial strategy exhibit a few key behaviors. First, they write down a financial strategy and stick to it. Secondly, nearly two-thirds of the group work with a financial professional. In doing so, they gain access to a professional in developing a custom strategy that fits their retirement goals. With concerns of inflation or a recession, financial professional help to keep them on track.

How to mitigate the effects of inflation on your retirement

Financial professionals are versed in products and solutions that can help mitigate the impact of inflation on your retirement strategy, particularly if you’re getting close to retirement age. Talk to a financial professional today about potential options.⁴ Together you can determine the appropriate path forward for you.

Regardless of whether a period of inflation proves short lived or not, it’s crucial to stay focused on your long-term financial strategy. A Park Avenue Securities financial professional may be able to help create a resilient strategy to meet your retirement goals