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4 Ways Inflation Is Ruining Your Retirement

From diminished purchasing power to delayed retirement, high prices are taking a toll

A distressed woman in soft focus sits on a sofa behind an empty wallet and empty jar labeled "Inflation".

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Inflation isn’t being felt only at the grocery store and the gas station — it’s also wrecking countless Americans’ retirements. 

As inflation soared to a 40-year-high of 8.6 percent, the Federal Reserve began to raise interest rates, prompting a sell-off in the stock market. The combination has resulted in a perfect storm for retirees unfamiliar with a high inflationary environment and a declining stock market. AARP research shows that 62 percent of workers say everyday expenses keep them from saving for retirement; 40 percent of workers cite debt payments as their main barrier to saving.

“Right now, Americans are seeing their purchasing power erode as the price of goods and service increases, the value of their retirement accounts takes a hit, and their investment returns plummet as the stock market slumps to new lows,” says Eric Henderson, president of Nationwide Financial’s annuity business. “While the Federal Reserve is raising interest rates to tamp down inflation, the cost of borrowing is rising, leaving many of us having to do more with less. In this environment, Americans are understandably nervous.” 

Nobody expects inflation to stay at 8.6 percent forever, but for now it’s ruining retirement in a number of ways, including the following: 

1. Diminished purchasing power 

The biggest hit to retirees in a period of high inflation is purchasing power. As prices rise, your dollars don’t go as far. “The typical family is watching $450 a month, on average, go and get nothing in return,” says Pam Krueger, founder of Wealthramp.com. “It’s like they are taking a pay cut.” That could hurt their ability to save for retirement.

If inflation is affecting your retirement savings, now’s a good time to assess your spending and reduce expenses to counter higher prices. AARP’s Money Map can help you create a savings plan and budget. “Some people may need to find a side gig or part-time role, while others may be able to increase cash flow by reducing costs in different areas,” Henderson says.

2. Savings not working as hard 

The return on savings, CDs and bonds has been pretty dismal, particularly with inflation so high. But recent rate hikes by the Fed don’t mean the cash in your bank account will increase overnight. “We know banks, brokerage firms and financial institutions are quick to raise rates on loans and mortgages,” Krueger says. “They tend to react slowly to raising savings rates. If your cash is earning 2 percent and inflation is running at 4 percent or above over the next 10 years, that has a damaging effect on purchasing power in the future.” Even if inflation comes down to 5 percent, the real return is going to be negative, she says. 

If you have a lot of money in cash, now may be the time to diversify, with holdings spread out over cash, stocks, bonds and other investments. If possible, work enough cash or liquidity into your investment plan to get you through one or two years of bills, Krueger suggests. That will prevent you from selling stocks at an inopportune time to boost your cash flow. “You never want to be forced to have to sell stocks,” she says. “Look at your entire plan, and make sure both your strategy and your plan account for inflation.” 


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3. Out-of-whack investment portfolios 

Staying the course without a plan is no longer an option when it comes to investments in the current inflationary environment. You have to make sure your portfolio is allocated properly and well diversified to cushion any blows that specific sectors may take due to rising inflation or higher interest rates. It’s important to do a stress check of your plan to make sure everything is aligned based on your investment time horizon and risk tolerance. “A portfolio is more than a pie chart,” says Rob Williams, managing director of financial planning at Charles Schwab. “It’s a combination of investments with differing levels of risk.” Williams says investors should have a mix of stocks, bonds, cash and commodities in their portfolio, and keep an eye on fees. The higher they are, the lower your returns. AARP’s Ace Your Retirement digital tool can help you create an investment plan.

4. Delays in retirement 

Even the most well-thought-out plan can be thrown off course in a high-inflationary environment. Add a recent steep stock market sell-off to the mix, and next year’s projected retirement may no longer seem realistic. That’s the case for many Americans who’ve been forced to continue working or return to work because of inflation. “The big question now is whether or not you can still retire given all these headwinds,” Krueger says. “If inflation is the biggest driver, then you probably need to consider working longer and not cut off your income so fast.” AARP’s Retirement Calculator can help you figure out how much money you’ll need.

Donna Fuscaldo is a contributing writer and editor focusing on personal finance and health. She has spent over two decades writing and covering news for several national outlets, including The Wall Street Journal, Forbes, Investopedia and HerMoney.​