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How to Plan For Inflation in Retirement

April 26, 2024
Retirement age couple standing in garden, smiling at each other

When the cost of goods and services is rising and your dollar has less power than it did yesterday, you’re facing inflation. Not all inflation is bad. It’s a natural economic phenomenon.

While inflation is a normal part of any economy, it has real impacts on retirement plans. Learn the many ways you can adjust your retirement plans in the wake of inflation and how institutions like DCU can help.

Understanding The Impact of Inflation on Retirement Savings

Long-term savings should have an interest rate higher than the national inflation rate to make sure your savings aren’t losing purchasing power rather than gaining capital for your future. For instance, DCU has three IRA solutions for your retirement, each starting with a different annual percentage yield (APY):

●      Certificate IRA: This IRA has a competitive APY and pays out dividends on a monthly basis. This account might have the best returns out of the three DCU options, but as it’s a certificate of deposit account, the assets you deposit won’t be available until the end of the term. A certificate IRA term lasts three to 60 months, making it the preferred option for people who won’t need access to their assets.

●      Money Market IRA: The Money Market account starts at a lower APY but has five dividend rate tiers. Money market accounts are more flexible, allowing you to make multiple deposits. Typically, you can make withdrawals out of money market accounts whenever you need to, making this an optimal choice for people who are closer to retirement and might need to use their funds.

●      Savings IRA: While the savings account IRA has the lowest interest rate, it’s also the most flexible. The account can be opened with only $10, making it a great choice for people who want to start saving for retirement before they have the resources to put a large percentage of their income into savings.

Strategies for Inflation-Resilient Retirement Planning

If you want your retirement savings to be resilient through times of inflation and whatever may come afterward, diversifying your retirement plan is key. Seeking out the help of a financial advisor may be an important step in this process.

Diversification of Your Investment Portfolio

Credit unions such as DCU often foster the financial health of their members through financial guidance. Interested in getting more help planning for your retirement? Learn about becoming a member at DCU. If you’re wondering how to protect your retirement savings from inflation, these are a few investments people turn to in times of inflation.

  • Stocks: To protect your retirement plans from inflation, it is important to allocate funds to inflation-hedging assets. Your inflation-resistant choices could include traditional investments such as buying stocks from the S&P 500 or a 60/40 stock and bond portfolio.
  • Bonds: Those who still want the safety that’s associated with bonds might be interested in investing in The Bloomberg Aggregate Bond Index during times of inflation. This index only invests in bonds that have an investment-grade risk, ensuring your money is going to a reliable source.
  • Commodities: Commodities can cover anything from food goods to electricity and even foreign currencies. During extreme times of inflation, you can invest in foreign currency in less inflated countries. Gold is another popular alternative investment.
  • Incorporating Treasury Inflation-Protected Securities: A type of US treasury bond, TIPS is protected against inflation, specifically.
  • Real Estate Investments: Real estate is a popular investment during times of inflation as property prices rise with the wave of inflation more reliably than stocks and bonds.
    • Rental Properties: Investing in rental properties is a reliable way to bring in income after retirement. Since rental rates rise with inflation, real estate is often relied upon as an inflation-proof investment. The lower mortgage rates from credit unions such as DCU can ensure that rentals allow favorable returns. Learn how DCU can help you invest in real estate.
    • Real Estate Investment Trusts (REITs): Those who don’t want the responsibility of owning rental properties or don’t have the extra capital for a down payment can still invest in real estate through REITs. REITs allow individuals to buy shares in commercial real estate development. Most REITs are publicly traded but some are not traded, making them non-liquid investments.

Incorporating Inflation in Retirement Income Planning

How does inflation affect retirement savings? How can you make a retirement plan in times of inflation? When you’re getting closer to retiring, planning becomes more involved than simply saving in the right IRAs.

It’s important to come up with a plan that factors in your lifestyle for retirement. What will your expenses be? Will you stay in the home you live in now or will you downsize? Are you planning on taking a part-time job? Will you be traveling from coast to coast?

Your vision for retirement will affect how much money you need to save. A detail you may not have envisioned? Inflation. Calculating inflation into your retirement equation will affect your buying power and will help you accurately estimate how much money you’ll need in retirement.

Check out DCU’s calculators to help crunch your living expenses during retirement.

Dynamic Withdrawal Strategies

Managing cash flow through the decades of retirement is a daunting task. Coming up with a strategy can help ensure you live comfortably throughout your retirement. Here are a few ways people manage their retirement savings.

  • Safe Withdrawal Rate (SWR) Adjustments: Many people often use the 4% rule. This means they spend 4% of their total portfolio value on a yearly basis. It’s recommended you adjust for inflation every year during retirement for the next 30 years after retirement to ensure the 4% rule is keeping you on track.

Annuities and Inflation-Adjusted Payouts

An annuity is an insurance contract that’s issued by a financial institution, they’re either paid out monthly or in lump-sum payments. If you’re interested in getting paid the exact same amount monthly, you’ll want a fixed annuity. A variable annuity pays lower monthly payments when the fund is doing poorly and higher payments when the fund is doing well. This keeps the annuity well-funded, ensuring healthy returns for the future.

If you want more from your annuity, consider adding a rider. Runners provide more benefits to the annuity beneficiaries. For instance, long-term care riders ensure coverage for expenses such as nursing homes.

Social Security and Inflation

If you’re planning on claiming Social Security benefits as part of your retirement income, you’ll be among the majority of the US population. While Social Security has been adjusting for inflation since the 1970s, the adjustment to the payouts typically falls short of the actual cost of living.

You’re eligible to start receiving Social Security benefits at the age of 62, however, if you delay claiming your benefits until your Full Retirement Age (FRA) then your benefits may increase.

Frequently Asked Questions About Inflation and Retirement

  • How often should I review and adjust my retirement portfolio for inflation?

Adjusting your retirement portfolio doesn’t have to be a big production. Get comfortable adjusting to the economy. Sometimes that might mean buying more stocks and selling your bonds. There’s no magic number of times to check in, just get to know your account. You'll feel more comfortable adjusting your investments as the economy fluctuates. 

  • Can downsizing in retirement help manage inflation risks?

Downsizing your lifestyle can help retirees maintain a stable lifestyle during times of inflation. Moving to a more affordable place can cut down on the amount of taxes, electric and maintenance costs that come out of your budget, leaving more money in your accounts to grow compound interest.

  • Are there any drawbacks to annuities with inflation riders?

Like many other investments that are relatively safe, annuities have a low enough growth rate that they may not be able to keep up with inflation. Variable annuities may be more favorable in times of inflation as you can choose investments, much like a mutual fund.

  • Do pensions increase with inflation?

While pensions do have a cost-of-living adjustment, the rate of adjustment typically doesn’t keep up with inflation.

Creating a Comprehensive Inflation Plan

When you’re planning for retirement in times of inflation, life can get a little complicated. You shouldn’t hesitate to ask for help. Credit unions, such as DCU, offer guidance to their members to help secure a healthy financial future. Consider becoming a member to get the guidance of DCU experts.

No matter who you turn to, it’s smart to seek professional advice for inflation-resistant retirement planning strategies. There’s no one-size-fits-all when it comes to retirement planning, everyone’s needs are different.

If you are serious about retirement planning, start out by setting realistic expectations and goals for yourself. The economy will always fluctuate. You can be prepared for whatever might happen if you stay ready to fluctuate with it. When you need help in the ups and downs that every economy offers, find a credit union like DCU to help you navigate your financial future.

Please note, membership is required to open a DCU retirement account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.