Will Inflation Cause You to Run Out of Money in Retirement?

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Inflation is something that most people are tired of hearing about because they know it hurts their buying and saving power. While there is little that can be done about it on a national and global level by the individual, every person nearing retirement, or those who have already retired, should be concerned about the possibility of running out of money. The good news is that you can take steps to help negate some of the effects of inflation.

Every year, inflation causes people to spend more money to get the same products as the year before. For people not yet retired, it likely hurt your retirement investment plan because you could not put as much money into savings as you did when there were lower inflation rates.

The Federal Reserve aims to keep inflation rates at around 2 percent annually. In the last couple of years, this has not happened. Instead, inflation went as high as 9.1 percent in June 2022, then down to 3.36 percent by April 2024.

Inflation Reduces the Interest on Investments

When inflation rates are higher than average in any given year, the interest earned on investments is reduced. It also means that retirement accounts will earn less interest.

Recent inflation rates have caused seniors and those nearing retirement to become concerned. The biggest concern is that they will run out of money sooner than they anticipated a couple of years ago. A survey from the Schroders investment firm revealed that as many as 68 percent of seniors are fearful that they have not saved enough.

Among those concerns, the cost of healthcare ranks among the highest. Another problem is that seniors know that inflation will reduce the value of their investments and savings they were counting on in retirement.

FoxBusiness says that a survey conducted by ResumeBuilder found that many seniors are already taking action to fight the rising costs, including grocery prices. The survey discovered that as many as one in eight retirees are planning to return to work this year because the current costs are rising faster than they had anticipated.

Inflation Producing Uncertainty in Seniors

Almost everywhere they look, seniors find that prices on most everything have increased. Because many seniors live on a fixed income, they often do not have the opportunity to change their situation. Of course, it is not just the seniors that are affected. Even many who live above the poverty level are struggling to cope with the rapidly rising costs of feeding a family.

Besides inflation affecting buying power, BusinessInsider says that the Schroder survey also learned that inflation may affect the health of as many as 26 percent of retirees. They are losing sleep over the impact inflation is having on their finances.

Fear Among Millennials to Invest

Seniors are not alone in having uncertainty about the future financially. Finance.Yahoo reveals that as many as 62 percent of millennials hesitate to invest their money because they fear the stock market’s poor performance will cause them to lose money. They also claim they do not know how to invest their money in their employer’s retirement plans.

Keep Putting Money Into Savings

One of the best ways to prepare for inflation is to keep putting money into your retirement account and savings. Everyone has different needs in retirement, and what you need is not likely what someone else needs. A retirement income calculator can help you determine how much you will need. Only a few people reach one million dollars in savings by age 65.

Consider a Roth Conversion

If your retirement money is in traditional accounts such as an IRA or a 401(k), you will pay taxes on that money when you withdraw it. The taxes you owe will reduce the amount of money you have in your retirement years.

Money put into a Roth IRA or a Roth 401(k) is after-tax. When you withdraw it, you will not pay any taxes on it. It gives you more money during retirement. You will be required to pay taxes on any money you roll over from a traditional account to a Roth account. You can overcome large tax bills from your rollovers by rolling over some money each year.

Another benefit of a Roth account, Forbes says, is that Roth accounts do not have any required minimum distributions. Also, the current low-income tax rates (established by the Tax Cuts and Jobs Act of 2017) will expire in 2026, which means you could be put into a higher tax bracket when it happens.

Be Prepared for a Possible Shortfall From Social Security

Even though Congress understands Social Security will have to cut benefits by about 17 percent by 2035, they have not yet done anything about it. The projected shortfall means you may need more money in savings to make up the difference. Until then, Social Security increases the benefits annually to account for inflation.

How to Prepare for Inflation

If you are not yet retired, there are several ways you can prepare for inflation. Benzinga mentions reducing your debt before you retire—to enable you to live on less, contribute the maximum amount into your retirement accounts—at least enough to get the matching amount from your employer, and spread your investment across various asset classes.

Instead of taking Social Security as soon as possible, delay it until you reach your full retirement age. The benefits increase by 8 percent each year you wait, and it will give you much more each month.

You can upgrade your retirement planning and reduce your at-risk investments by consulting with a financial advisor or estate planning attorney about your retirement investment options. If you want a comfortable retirement, continue contributing as much as possible to your retirement accounts.

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