As you plan for retirement, you’ll need to budget for inflation, which could raise your monthly expenses. This guide provides a number of helpful budgeting tips.
A significant aspect of retirement planning involves anticipating what will happen in the future, which can be challenging. You don’t know what emergencies or future expenses may arise. However, one given when budgeting for retirement is the possibility of inflation. The rising cost of goods and services means the money you set aside today might not stretch as far in the long term. These changes can feel even more challenging for retirees on fixed incomes, potentially disrupting your carefully crafted budget.
Accounting for this rise is essential when creating your retirement budget. In this article, we’ll break down inflation and how to adjust your retirement plan.
Inflation is when the cost of goods and services rises over time, decreasing the purchasing power of money. For example, the value of a dollar today may not be as much as two years from now, as you won’t be able to buy as many items with it. Inflation occurs naturally with time, but some world events can cause spikes. Historical events like World War I and the COVID-19 pandemic have all created bouts of inflation due to imbalances in supply and demand.
As a retiree, inflation can be uniquely challenging. If you only live on a fixed income, such as your retirement savings or Social Security benefits, you won’t be able to adjust to rising costs easily. Instead, you’ll burn through your income much faster to keep up with essential goods and services like groceries, utilities, and healthcare — all of which retirees desperately need.
While you can’t always predict when historical events will create unprecedented rises in inflation, you can develop strategies to ensure your retirement savings maintain its value and utilize other financial hacks to keep yourself afloat in retirement.
When planning for inflation before you retire, it’s essential to look at your budget and evaluate which aspects will be affected the most by inflation. The most notorious are:
While medical care has advanced with new technology, it has become more expensive. According to a Statista report, the average inflation rate for medical care between 2000 and 2023 was 3.5%, which contrasts significantly with the annual national average of 2.8%. There are various reasons for this. Notably, the healthcare field has been losing its labor force, which affects the supply of medical care despite the growing need for it among an aging population.
Due to rising medical costs, health insurance has also been rising to offset the costs. From 2007 to 2023, health insurance had an average inflation rate of 5%—a vastly higher rate. While many retirees plan to rely on Medicare, the public health insurance for retirees, many others opt for additional plans like Medigap or Medicare Advantage to increase their coverage. If you plan on utilizing these healthcare insurance plans, expecting the costs to rise with inflation is essential.
Everyday essentials like utilities and groceries are often the most notable victims of inflation — regardless of whether you’re a retiree. The cost of housing, electricity, gas, water, and heating often rises steadily over time, driven by increased energy demand, supply chain disruptions, low supply of land and housing, and changing market conditions. These incremental increases can add up quickly for retirees on fixed incomes, straining monthly budgets.
Groceries are another major expense where inflation takes its toll. Fluctuating prices for staples like bread, fresh produce, and meat can significantly impact household spending. Even slight increases in food costs can feel burdensome over the years.
You need these essentials to survive, so it’s natural to expect the cost of items to rise.
While many retirees may not initially need to live in an assisted living or retirement home, many eventually need the support as they age. Similar to the reasons why medical care and housing costs can rise, long-term care rises as facilities work with a diminishing labor force and increased demand among a growing retirement community. From 2002 to 2022, the average inflation rate for long-term care was 2.32%. While the cost for a nursing home was $100,740, retirees need to factor in that inflation if they expect to use these facilities when budgeting for retirement.
While the future may seem doom and gloom when estimating the costs of retirement affected by inflation, not all aspects of your retirement will rise. Here are a couple that we expect to stay the same.
Unlike adjustable-rate mortgages, fixed-rate mortgages have the same interest rate on your housing, no matter what the market looks like. This equates to predictable monthly payments if you pay your mortgage off after retiring.
That said, many retirees still strive to pay off their mortgage before retiring to avoid the stress of paying for housing either way. Without a monthly mortgage payment, retirees can reallocate that money toward other essential expenses that may be affected by inflation, such as healthcare or food. It also provides peace of mind, allowing retirees to enjoy their later years without the burden of housing debt.
Many retirees and people with disabilities depend on Social Security benefits to replace some, if not all, of their income. Because of this, the Social Security Administration provides cost-of-living adjustments (COLAs) to all of their payments. As a result, recipients don’t have to worry about paying for essential items that have risen in cost.
While you can’t control inflation when planning your retirement, you can prepare for it. Here are a couple of strategies to financially protect and support you:
In addition to everyday essentials, housing, and healthcare, inflation can also affect investments. However, not all investments may be affected by inflation. As such, diversifying your investments is the best way to avoid the restraints of inflation and maintain a reliable income. For example, while cash savings and fixed-income investments like bonds often lose value during inflationary periods, other assets, such as stocks, real estate, and commodities, can provide better protection or even grow in value.
That said, make your investments with Medicaid in mind if you utilize it. Since Medicaid is a needs-based healthcare for those 65 or older, you can only receive it if your income does not exceed a certain amount. Therefore, you may not qualify for Medicaid if you need to sell certain investments. If you do need to sell certain investments to protect yourself against inflation, work with a financial advisor who will be able to manage withdrawals and investments strategically
While no one wants to change their lifestyle when they want to live comfortably, small changes can significantly boost your bottom line when trying to stretch your budget and avoid inflation. Simple lifestyle changes, such as dining out less frequently, downsizing to a smaller home, or prioritizing affordable travel options, can help you stretch retirement savings further.
For retirees enrolled in Medicare, evaluating supplemental insurance options like Medigap or Medicare Advantage plans can lead to cost savings. Medigap plans, or Supplement Medicare, cover out-of-pocket expenses like copays and deductibles. As a result, you can expect predictable healthcare costs in your premiums and avoid costly medical bills that may rise with inflation. Alternatively, Medicare Advantage plans often have lower premiums. While they may also require higher out-of-pocket costs for services, it may be a better option if you don’t need as much coverage as Medigap. Switching between these plans based on your specific healthcare needs and budget could save money as inflation increases other living expenses.
Ultimately, planning for retirement requires looking forward—not just to the good times but also to the challenging times caused by inflation. One way to do this is to monitor inflation trends and adjust your budget accordingly.
The best sources to keep you informed about inflation trends are the U.S. Bureau of Labor Statistics and the Federal Reserve Economic Data, which provide future inflation projections. If both sources predict inflation to rise soon, you may need to postpone retirement. In the meantime, you’ll be able to build your retirement savings even more, allowing you to enjoy your golden years even more.
While no one likes inflation, it’s a fact of life that we can only plan around. As long as you dedicate a small portion of your mental energy toward building strategies in response to inflation in your retirement plan, you’ll thank yourself in the future.
Inflation reduces the purchasing power of your retirement savings over time, meaning that as prices for goods and services rise, your savings can decrease if you don’t adjust your lifestyle or investment choices.
Many retirees use investments such as Treasury Inflation-Protected Securities (TIPS), real estate, and stocks to help protect themselves against inflation. Diversifying your portfolio with inflation-resistant assets can help preserve your savings’ value over time.
Social Security provides cost-of-living adjustments (COLAs) designed to keep pace with inflation. However, these adjustments may not fully cover inflationary increases, especially in areas like healthcare. It’s essential to have other inflation-proof financial strategies in place.
You can adjust your retirement budget by prioritizing necessary expenses like healthcare and housing and reducing discretionary spending. Regularly reviewing your budget and planning for periodic increases in the cost of living can also help you stay on track.
No, having a fixed-rate mortgage is beneficial in periods of inflation because your mortgage payments remain the same, even as the cost of other living expenses increases. Paying off your mortgage before retirement can also further reduce inflation-related financial stress.
It’s a good idea to reassess your retirement budget at least once a year. This allows you to adjust for any changes in inflation, healthcare costs, or unexpected expenses, ensuring your financial plan remains aligned with current economic conditions.
Dive into all of the free information at My Guide To Retirement to help protect your savings, maintain your lifestyle, and confidently navigate the challenges inflation and retirement may bring.
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