We’ve all felt the weight of inflation in recent months, whether at a grocery store, a gas pump or a restaurant. But rising prices don’t just put a damper on our current spending; they are a threat to our retirement income as well.
When it comes to building a retirement nest egg, “most households want to maintain a certain standard of living, not just a certain dollar amount,” says Anqi Chen, senior research economist for Boston College’s Center for Retirement Research. If your retirement savings and income don’t keep up with inflation, you may have to cut back substantially on spending if you want your money to last.
Fortunately, there are ways to blunt inflation’s impact on your long-term financial health, some built into particular income streams and savings vehicles, others dependent on your choices. Here’s how different sources of retirement funds protect against inflation — or don’t.
Ninety percent of Americans age 50 and over say they are worried current or future Social Security benefits won’t keep up with inflation, a recent AARP survey found, but Social Security may in fact provide the best defense against inflation among retirement vehicles.
Benefits have built-in inflation protection in the form of an annual cost-of-living adjustment (COLA). If a government measure of consumer prices shows an increase from year to year, Social Security payments rise by an equivalent percentage. The 2023 COLA is 8.7 percent, the biggest benefit boost in more than 40 years.
Social Security’s inflation shield is imperfect because the COLA reflects the previous year’s price changes. For example, 2022’s 5.9 percent adjustment, based on 2021 price increases, was quickly eclipsed by the year’s surging inflation. But over time, it offers a consistent safeguard of retirees’ buying power.
Retirement savings and other investments
Investments in an individual retirement account or 401(k) plan are not adjusted for inflation. They increase or decrease in value as the market rises and falls, and they protect against higher prices only to the extent that your rate of return matches or exceeds the rate of inflation.