How Inflation Can Impact Your Retirement Savings

Inflation is hard to overlook whether you’re filling up your grocery cart or your gas tank. But inflation’s impact goes beyond everyday spending. As you prepare for the future, it’s important to keep inflation in mind. Costs for housing, prescriptions, medical care, and necessities may continue inching higher over the coming decades. Fortunately, proactive retirement planning can help you safeguard your future from inflation and the economic changes that may come with it.

Social Security might not keep up.

Technically, Social Security benefits increase with inflation. The Social Security Administration reviews benefit amounts annually and makes adjustments that reflect increases in the cost of living^[1]. However, those increases may not always be enough to cover retirees’ major expenses, like long-term care or prescriptions.

While Social Security benefits are helpful, there’s a good chance you’ll want to supplement them with additional retirement savings if possible. To maximize your Social Security benefit amount, you may want to wait until your full retirement age to begin drawing benefits.

Savings may lose value.

In May 2024, the U.S. inflation rate was about 3.3%^[2]. Whether you’ve only just begun saving for retirement or you’re planning to retire in the next few years, the money you’ve invested or set aside has probably already lost some purchasing power. To offset the effects of inflation on the value of your savings, you may want to add a buffer to your retirement savings goals. When your income increases or you receive money unexpectedly, consider investing a little extra in your retirement savings.

You may have to dip into your savings before retirement.

Inflation may pose a risk to your retirement savings long before you’re ready to retire. As the cost-of-living increases, you may be tempted to withdraw from your retirement savings early to cover unexpected expenses, make up for lost income, or bridge gaps in your budget.

Ideally, you should turn to emergency savings and explore other options to make ends meet before touching your retirement funds. If you don’t have another choice, withdrawing money from your retirement savings isn’t necessarily the end of the world but may involve tax penalties. However, after the need passes, it’s essential to recover your savings by increasing your contributions whenever possible.

Safeguard your retirement from inflation.

Understanding how inflation may impact your retirement could help you make informed choices to protect your future. For example, you may want to incorporate investments in assets that are traditionally safe from inflation into your financial planning process.

Maintaining an open mind about your retirement goals could also help you adapt to inflation. Maybe you’ve long hoped to spend your retirement with your toes in the sand at a Florida beach, for instance. Your retirement savings may go further in a different coastal state, like North or South Carolina. Creative alternatives could help you enjoy a high standard of living on your retirement savings.