Accounting for inflation in your retirement plan

August 30, 2022
A pillow that looks like a dollar bill

When planning for retirement, there are many questions to consider. How much should you defer? How should you allocate your assets? What about withdrawal rates? While these are all important things to consider, one topic that tends to be forgotten is inflation. What part does it play in saving for retirement?

In simple terms, inflation is the gradual increase of prices for goods and services over time — for example, you’ve no doubt noticed that it costs a bit more to fill your gas tank or buy your weekly groceries right now given today’s high-inflation environment. Essentially, rising inflation can lead to a negative effect on your purchasing power or the value of your dollar. As prices increase, your dollars will buy less.

Because of that, inflation can affect your retirement savings. For example, if someone has $100,000 in their retirement account and the inflation rate is at 3%, $100,000 will spend more like $85,000 in as little as five years. In 30 years, it will spend more like $40,000. That’s why it’s important to use your resources to stay ahead of inflation.

In most retirement plans, you have the ability to invest in a selection of mutual funds. Some are more conservative, and some are more aggressive. Bonds, money markets, and stable values are the most conservative options, because money markets invest in cash equivalents — or in the case of bonds and stable value, you are loaning money to the underlying companies. By investing in conservative funds like these, your account balance may not fluctuate as much, but with inflation causing goods and services to increase in price, it can significantly erode your purchasing power. Stocks and equities, on the other hand, are typically more aggressive than bonds or money market/stable value options. When you invest in stocks and equities, the volatility may be higher, but they may provide a higher rate of return to keep you ahead of the inflation rate.

Another possible option is to invest in Treasury Inflation Protected Securities. You can invest in these funds in an IRA or in your qualified plan if they’re offered. These funds are designed to keep up with the inflation rate. While your rate of return will not exceed inflation, at least you can feel more confident that your assets may be more secure, and your purchasing power will not be eroded. This type of investment vehicle complements other investments nicely while providing some insulation for your retirement savings.

Everything around us has, and will continue to, become more expensive. But by having the proper investments and tools at your disposal, there are always ways to be prepared for inflation.

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