Inflation is a topic that often elicits frustration and concern among individuals due to its negative impact on buying power and savings. While it may seem like there is little that can be done about inflation on a national or global level, those nearing retirement or already retired should pay attention to its potential effects on their financial stability. The good news is that there are steps individuals can take to mitigate the impact of inflation on their retirement funds.
One of the immediate consequences of inflation is the increased cost of goods and services. This means that individuals need to spend more money each year to purchase the same products they bought previously. For those who haven’t retired yet, this can have a detrimental effect on their retirement investment plans. With higher inflation rates, it becomes more challenging to save as much money as before.
The Federal Reserve aims to keep inflation rates around 2 percent annually. However, in recent years, this target has not been met. Inflation rates reached a high of 9.1 percent in June 2022 before decreasing to 3.36 percent by April 2024. These fluctuations in inflation rates can have significant implications for retirees and those nearing retirement.
Concerns about running out of money during retirement have become more prevalent due to recent inflation rates. A survey conducted by the Schroders investment firm revealed that 68 percent of seniors are worried about not having saved enough for retirement. Among their top concerns is the rising cost of healthcare. Moreover, seniors understand that inflation reduces the value of their investments and savings, which they were relying on for retirement.
The impact of rising costs is not limited to seniors alone; even individuals living above the poverty level are struggling to cope with the rapidly increasing expenses of supporting a family. This situation has led to heightened uncertainty and financial insecurity among seniors and others affected by inflation.
In addition to affecting buying power, inflation is also taking a toll on retirees’ overall well-being. A survey by Schroders found that as many as 26 percent of retirees are losing sleep over the financial impact of inflation. These individuals are concerned about their ability to maintain their desired standard of living in the face of rising prices.
It is not just seniors who are grappling with financial uncertainty. Millennials, too, are hesitant to invest their money due to fears of losing money in the stock market and a lack of knowledge about retirement plans offered by their employers. This widespread apprehension about investing further adds to the overall sense of unease regarding financial stability.
To prepare for inflation, it is crucial to continue contributing to retirement accounts and savings. Each individual’s retirement needs will vary, so it is essential to assess personal requirements using a retirement income calculator. It is worth noting that only a few individuals manage to save one million dollars by the age of 65.
Another strategy to consider is a Roth conversion. If retirement funds are held in traditional accounts such as IRAs or 401(k)s, individuals will pay taxes on the money upon withdrawal. This reduces the amount available during retirement. In contrast, funds invested in Roth accounts are after-tax, meaning they can be withdrawn tax-free. By gradually rolling over money from traditional accounts to Roth accounts each year, individuals can avoid incurring significant tax bills.
Roth accounts offer additional benefits, as highlighted by Forbes. They do not require minimum distributions, and they provide a hedge against potential future tax increases. The current low-income tax rates established by the Tax Cuts and Jobs Act of 2017 are set to expire in 2026, potentially resulting in higher tax brackets for individuals.
Furthermore, it is important to be prepared for a possible shortfall from Social Security. Congress has yet to address the projected 17 percent benefit cut expected by 2035. This shortfall may necessitate having more savings to make up for the reduced Social Security benefits. In the meantime, Social Security benefits are adjusted annually to account for inflation.
For those who have not yet retired, there are several strategies to prepare for inflation. It is advisable to reduce debt before retirement, as this allows for a more manageable budget. Contributing the maximum amount to retirement accounts, at least enough to receive employer matching contributions, is also crucial. Diversifying investments across various asset classes can help mitigate risk. Delaying the start of Social Security benefits until reaching full retirement age is another strategy, as it results in higher monthly payments.
Seeking guidance from a financial advisor or estate planning attorney can provide further insight into retirement investment options and help individuals make informed decisions. Ultimately, continued contributions to retirement accounts are essential for a comfortable retirement.
In conclusion, while inflation may seem like an uncontrollable force, there are proactive steps individuals can take to protect their retirement funds. By staying informed, planning ahead, and making strategic financial decisions, it is possible to navigate the challenges posed by inflation and ensure a secure financial future.
