graph showing inflation growth

What About Inflation? How to Combat Inflation in Your Retirement Plan

Americans are faced with inflation on a daily basis – the price of gas was once just $1 a gallon, a loaf of bread was $1.50; certainly not the case today. Yet inflation is commonly overlooked when planning for retirement. Why is that?

Inflation is different than cost of living. Cost of living is how much it will likely cost you to live in a particular area. Inflation is how much that price will cost later down the road.

As a financial advisor in Annapolis, I’ve seen how inflation can chip away at a retirement. Inflation is particularly challenging because it slowly erodes the value of your money over time. You may not notice it if you are not looking. You just wake up one day and realize that $20 in your pocket used to buy an entire shopping cart of groceries, but now it only buys two or three items. 

The good news is there are strategies you can use to combat it. 

Inflation and Your Retirement Savings

If you live off $50,000 a year today, you’ll need just under $82,000 in 20 years and about $105,000 in 30 years to maintain the same standard of living, assuming a 2.5 percent inflation rate. 

This means that the annual income you’ll need in retirement will likely gradually inch higher than what you need now, even if you expect your expenses to decrease. 

Keep inflation in mind as you continue saving for life’s next chapter. You don’t just need to think about saving enough to cover your expenses now; you need to save enough to provide a sufficient income in the future.


Ready to have a real conversation about securing your future? Contact Scarborough Capital Management to see how we can help.


5 Ways to Combat Inflation in Retirement

The first step to combating inflation is to be realistic about how much money you’ll need in retirement. 

You could use an online retirement calculator to figure this out, but you’ll get a more accurate projection if you use a retirement software. These sophisticated tools are commonly offered through financial advisors and allow you to plug in various inflation rates for different spending categories to come up with a realistic target. 

Once you know how much money you should save, you can use the following strategies to work toward your goal:

1. Invest with Inflation in Mind

Many pre-retirees want to keep their portfolio as conservative as possible when they head into retirement. But it’s important to remember that your retirement could easily last 20 or 30 years and your portfolio needs to continue to outpace inflation during this time, so you lower your chances of running out of money. 

One way to do this is to consider investing in securities that take inflation risk into account or provide a hedge against it. Some common securities that focus on inflation are Treasury Inflation Protected Securities (TIPs), Inflation Protected bond funds, and floating rate funds.

inflation chart Scarborough Capital Management

2. Create a Safe Withdrawal Rate

A general rule of thumb is that you can safely withdraw 4 percent of your portfolio value over 30 years without a significant risk of running out of money, but remember, retirement planning is not a one-size-fits-all equation. If inflation is not considered in your plan, or the market has a major downturn, or you violate the 4 Percent Rule even once, you could run out of money long before retirement ends.

Instead, it’s wise to work with a trusted financial advisor to determine a withdrawal rate that’s right for you. Depending on your situation – such as the amount of debt you have, your living expenses, and your portfolio – a different withdrawal rate may be more realistic.

3. Lower Housing Costs

If you’re a renter, keep in mind that rent prices tend to rise with inflation. You may want to consider relocating to an area with a lower cost of living in retirement or look for more affordable housing. 

If you have a mortgage, there’s some good news. Your payment stays the same regardless of how much inflation rises. But you may still feel the effects of inflation when it comes to property taxes, home insurance, upkeep and utilities. If you’re living in a larger house than you need, you may consider downsizing to reduce some expenses.

4. Delay Retirement

Delaying retirement may not be ideal, but it could be a smart move depending on your situation. When you delay retirement, you shorten your retirement period, which reduces the number of years your savings is subject to inflation. 

Working longer also has other benefits. For example, it could allow you to delay Social Security payments until closer to age 70, which could increase your monthly payment by as much as 32 percent

If putting off retirement isn’t an option, you could consider picking up a part-time job to offset inflation. If you’re paid a competitive wage, you may not have to pull as much money from your investments right away.

5. Look for Ways to Trim Expenses

Trimming unnecessary expenses can go a long way in stretching your nest egg in retirement. Even if you cut $200 a month from your budget, that adds up to $72,000 over the course of 30 years. Take a moment to review your retirement budget to see if there are any expenses you could reduce or eliminate. 

Start Planning Now

Inflation is just one of many hidden risks you may face in retirement. One way to stay ahead of it is to build it into your financial plan. Inflation can’t catch you off guard if you see it coming. 

At Scarborough Capital Management, we specialize in helping individuals and families prepare for retirement. One way we do this is through comprehensive financial planning that stress-tests for several hidden risks you may face in retirement, such as inflation, healthcare costs and longevity. 

If you’d like help planning your financial future and preparing for the unexpected challenges life may throw your way, we invite you to give us a try. Schedule a no-strings-attached conversation to discuss your needs, goals and concerns. From there, we can work with you to create a comprehensive financial roadmap.

Scarborough Capital Management has been helping busy people make smarter financial decisions for more than 30 years. With affordable 401(k) management services plus full-service financial planning and wealth management, our team of financial advisors can help you work toward your financial goals … now and in the future. Don’t put it off any longer. Get the conversation started.

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