Saving for Retirement in the Age of Inflation

Inflation is cooling. Yay. But prices are still high. If nothing else, the current inflation situation makes me think it’s probably a good idea to take a hard look at how much money you might need in retirement.

I hate to play the what-if game, but … what if I were retired and crazy high inflation made a comeback? In other words, how can I make sure my money isn’t going to wind up being worth a lot less in retirement? Given how expenses keep spiraling up, that seems like a realistic possibility and not just unnecessary pessimism.

Quite a few Americans are forgoing long-term saving in response to the impact of continuing inflation on everyday expenses, Allianz Life found in a recent study:

• 67% are nervous about investing but don’t want to miss out on a recovery
• 54% have stopped or reduced retirement savings due to inflation
• 75% are worried the rising cost of living will affect their retirement plans

“Inflation is pretty much a part of life, so it should always be taken into account when planning for the day you no longer work,” says Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners.

Remember that inflation fluctuates, which means the recent high rates shouldn’t get you down. Instead, look at averages over time. McClanahan points out that even with the high rates of inflation now and in previous decades (like the 1970s), the average rate of inflation over history is about 3% — the percentage McClanahan uses when accounting for inflation in financial plans for her clients.

Reminder: these five factors matter most for planning your retirement:

1. Spending rate
2. Saving rate
3. Longevity
4. Rate of return
5. Inflation

You can control just two of them — how much you spend and how much you save — but those are the most important, McClanahan says. “Save as much as you comfortably can without sacrificing a good life in the present,” she says.

And be flexible about how long you’ll work. “Working is the best hedge against inflation,” McClanahan says. “Try to find work you love so you won’t mind doing it for longer.”

For more on inflation, check out our reporter Adam Hardy’s story.

— Jill Cornfield, deputy editor

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