Protect Your Retirement: Understanding Inflation's Impact

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You've likely seen the headlines about the 2022 inflation rate. The consumer price index (CPI) is up to ​7.5 percent​ since this time last year. You've experienced the impact of inflation on your cost-of-living, juggling decreased buying power with the price increases on housing, food, energy and everything else.

And then there is your retirement plan. Are the effects of inflation eroding the value of what you have saved?

How Inflation Affects Retirement Savings

Inflation means a decrease in your purchasing power. As prices rise, the value of your dollar goes down. So, there's that. Inflation also stirs up the potential for increased interest rates. The U.S. Federal Reserve (the Fed) is expected to bump up interest rates up to three times in 2022.

When interest rates go up, so does the cost of borrowing. Mortgage and loan payments increase, while companies' profit margins may decrease. This is how rising inflation may impact the stock market which, in turn, impacts your retirement accounts.

Depending on your current portfolio and how many years you have until retirement, your advisor may suggest a few changes or none at all.

And while it may seem like an interest rate hike would make you earn more on your savings account, the rate of return you see on savings (if you see one) isn't likely to be a match for the record-high inflation rate.

If part of your retirement plan includes real estate investments, either directly, through a real estate investment trust (REIT) or as part of an investment platform like Fundrise, you may have seen positive returns in 2021. But real estate also has its risks, especially when interest rates rise.

Social Security benefits are impacted by higher inflation because the annual cost of living adjustment (COLA) isn't keeping up with the economy. While the Social Security Administration boosted benefits ​5.9 percent​ in 2022, basic math shows you that still sets it behind the inflation rate.

In short, inflation rocks everything with value, including those things you hope to make money on for your nest egg. If the growth of your retirement portfolio can't keep ahead of annual inflation in the long term, your retirement income will lose some value.

How to Manage Retirement During Inflation

The most important thing you can do is sit down with your certified financial planner or financial advisor. Depending on your current portfolio and how many years you have until retirement, your advisor may suggest a few changes or none at all.

Many experts are talking up the benefits of investing in index funds during periods of high inflation. Warren Buffet has long promoted index funds "through thick and thin...and especially through thin" as the answer to market unpredictability over time.

Roth IRAs and other tax-advantaged retirement accounts help offset the impact of inflation by reducing taxes on money earned.

Treasury inflation-protected securities issued by the federal government and inflation-adjusted annuities may sound good in name but check with your financial advisor to determine whether these are suitable investments for your retirement savings.

Don't panic or make any reactionary changes in your retirement plan without speaking with a trusted professional. Depending on your specific situation, your advisor may even tell you to ride it out, tighten the belt and keep planning ahead.

Today's Budget and Your Retirement Plan

Accumulating wealth for your retirement is part of your regular budget, right? However you do it, you set aside part of your current income for your future retirement income.

Because you are facing rising prices on nearly everything right now, it's a good idea to keep a close eye on your expenses and bolster your reserves. Keep on top of your debt and watch your credit card usage. Try not to take on any new debt, especially with rising interest rates on the horizon.

Managing your personal finances today will always have an impact on the money you'll count on as a retiree later. At times of high inflation, this is perhaps more important than ever.

To get through this inflationary period with your retirement savings intact, decrease spending, increase savings and talk to your financial advisor about your retirement portfolio.