What Rising Prices Can Mean for Your Retirement Plans | Personal Finance

Kate Ashford

According to a March 2022 survey by the Nationwide Retirement Institute, about 1 in 8 Gen Xers and Baby Boomers say they have postponed or considered retirement due to inflation. With inflation over 8% and a 40-year high, coupled with a stock market that has seen a double-digit decline since the start of the year, people’s concerns are not misplaced.

“We’ve had conversations with multiple clients over the past six months,” said Mark Rylance, a certified financial planner in Newport Beach, California. “Every advisor has clients who are going to push their spending, and they probably won’t change their spending habits, and those are the people who are at risk.”

As your retirement date is approaching, here’s what you need to understand about how inflation affects your retirement.

Why inflation matters

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Inflation indicates how much the cost of goods and services has increased over a period of time, usually a year. If the inflation on a particular item is 8%, it usually means it will cost you 8% more now than it was a year ago.

“In the simplest terms, if a retiree hypothetically spends $50,000 a year on variable expenses, and that $50,000 goes up 8.5%, what used to cost $50,000 now costs $54,250,” says Rylance. “The threat to retirees is that their spending will rise forever and their investment returns will not keep up.”

When should you run the numbers?

If you’re planning to retire in the next two years, you need to know what you’re spending on expenses now that prices are higher because that’s how much your savings should cover.

“We need to look at our daily cost of living, as well as our big expenses and other plans that lie ahead,” said Nicole Wirick, a CFP in Birmingham, Michigan. “From there, we look at what revenue sources we have available to fund those needs.”

In other words, what do you expect from Social Security? Do you have a pension? Do you have any other passive sources of income, such as a rental property? Do you have big spending plans, such as a trip around the world? And – more importantly – what do you regularly spend?

“Anyone who is ready to retire has to go through a pretty tough budgeting process,” says Rylance. “Every time people do it, they’re like, ‘Wow, I had no idea I spent so much on that particular thing.’ Just going through that process, they change that behavior themselves.”

How can you adjust your subscription?

If your retirement income and your post-inflation budget don’t match, you may need to rethink the timing of your workforce departure or the way you spend your money.

Reconsider spending pattern

Rethinking major purchases can help if higher prices make your retirement budget claustrophobic. If you have a big trip planned, consider waiting a year. Are you thinking about buying a used car and the prices have increased by 30%? Turn that off. Were you planning to move? You may want to wait for home prices to cool down a bit.

“If you don’t have to leave your house,” says Ashley Folkes, a CFP in Birmingham, Alabama. “You get the maximum price, but if scarcity doesn’t allow you to find a new home and prices are high, just wait.”

Reducing day-to-day expenses can also help your dollars go further. Adults said they would cut back on things such as dining out, driving and monthly subscriptions if prices continue, according to a recent CNBC/Momentive poll.

Working longer — or part-time

Another year (or more) in the workforce has the triple effect of allowing you to save more for retirement, allowing your nest to continue growing (if possible) and delaying withdrawals during what could be a down market.

You may also want to consider retiring but working part-time, which will allow you to take out less of your living savings. “If we are calculating a safer shot” [rate]Sometimes people are only $10,000 or $15,000 short,” says Rylance. If you can find something you enjoy doing part-time, you can fill the gap.

“It’s really not that complicated,” Rylance says. “You either cut your expenses or look for another source of income.”

Wait to collect social security

This can go hand in hand with working longer hours, but the longer you wait to start taking Social Security benefits, the higher your benefits will be. For example, after full retirement age, you get an 8% increase for each year you wait to claim Social Security.

In general, higher inflation means you need to check your math. For example, do you have enough savings to cover what you normally spend, even if everything costs a little more? And will your savings cover you for your full pension? If not, you need to make adjustments.

“There aren’t many things you can do to not survive your money,” Folkes says. “You can retire, you can work part-time, or you can spend less.”

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