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When inflation growth moves from a steady climb to a sudden burst, everything in your budget can suffer. You may feel this pain in well-known concerns, like groceries and gas, to other less pressing needs, like retirement savings. But the recent climb in inflationary pressure has led many to reevaluate their savings goals.

According to an annual survey by Northwestern Mutual, the average amount stated that one needs to retire comfortably grew to $1.25 million. It’s a 20% growth from the same survey last year. This jump in needs indicates that the rising inflationary regime has put significant fears in the minds of savers, pressuring them to save more.

And with good reason. The more inflation grows, the more you need to save in the future to cover regular, everyday costs when you retire. If you save the same amount, then it demands higher returns from your investments. You’re not in control of those returns, though, so it makes sense that people lean towards saving more – or at least think about saving more.

But this also shouldn’t imply that you must dramatically change your approach, depending on when you plan to retire.

Planning for inflation

One reason you don’t want to overstate your changing retirement needs just yet has to do with the long-term inflation rate. Often, when financial planners estimate inflation in a retirement scenario, they use the target goal of the Federal Reserve of 2% or 3%. More conservative estimates will lean to 3%. Even though current inflation growth has been significant, it has not yet proven that it will continue at this rate for a significant length of time to impact that long-term expectation.

How this can impact your savings goal will depend on how much time you have. Say you want to retire in 30 years, and you plan for a 2.5% inflation rate with an 8% investment return with a target of $1 million. In 30 years, that $1 million would actually be about $2.10 million when accounting for inflation, requiring you to save about $29,640 a year to reach the goal. If long-term inflation rises to 3.0%, then you would need to save about $37,500 a year to reach $2.43 million. It’s certainly a significant difference.

But it also doesn’t mean that long-term inflation expectations will shift due to what’s occurring today. The Federal Reserve Bank of St. Louis evaluated inflation swap contracts, which add a hedge to inflation for those concerned costs will rise. When it tracked the average rates in five-year contracts, the inflation mark listed rose from 2.3% in January 2021 to 2.65% in June 2022 and is still “well-anchored at around 2.5%,” the Fed wrote.

When looking over many years, it indicates that your inflation expectations shouldn’t change too much yet, even if the noise around rising costs is particularly loud right now.


Fighting inflation while retired

The group feeling the brunt of the current price surge are those already living on a fixed income in retirement. Drawing on retirement funds that are impacted by the drawdown in the financial markets results in the need to pull more money out at a time when your investments have likely fallen. This requires taking more out of the market, which results in fewer gains when the market recovers.

The best strategy to deal with this is lean on the emergency savings. For those near retirement, it’s also an important warning to ensure you have plenty of funds in short-term savings accounts or certificate of deposits that you can tap when needed. It’s often advisable to have a year’s worth of expenses stored in these accounts when approaching retirement, to protect against a downturn in the market.

Those in retirement can use these funds while the market recovers. But you may have to deplete these funds faster than expected, since your expenses have risen. Make a plan for how to approach depleting your emergency savings now, so if you lose a chunk of it to pay for short-term costs, you know how you will respond.

Leaning on less impacted investments, like potentially certain bonds (such as Treasury-Inflation Protected Securities) or real estate exposure, can ease the impact.

Don’t worry about Social Security

The good news in this? Social Security payments adjust with inflation. It will rise with inflation, whether you’re planning for the future or in retirement today. In October, the Social Security Administration announced that benefits would increase by 8.7% next year. The average retiree will see $146 more per month due to the rise and it’s the largest increase since 1981’s 11% boost. Just watch out, as the Internal Revenue Service (IRS) can tax Social Security if you earn above $44,000, which includes investment income. The IRS hasn’t shifted that number due to inflation, at this time.

And for those with funds to spare, then you can also save more due to inflation’s pull. The IRS announced that 401(k) and other qualified plan contribution limits increases to $22,500 next year, up from $20,500 in 2022. Those over 50, can add an additional $7,500 per year, up from $6,500.

While these measures certainly help, a decline in inflationary growth will eventually prove the best way to ease the long-term angst.


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