Is Your Retirement Plan Inflation-Proof?

Many consumers today are familiar with inflation in the context of paying more for things like groceries, gas, and entertainment. But inflation has long been a persistent economic factor that's pretty much unavoidable. The primary difference is that inflation is typically more subtle than it's been in recent years, driving living costs up slowly but surely over time (as opposed to the rampant, out-of-control inflation we all experienced in 2022 that left many of us stressed and dumbfounded).

The problem with inflation, though, is that it has the potential to wreak havoc on your retirement. So it's important to take steps to avoid that scenario.

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Why inflation might negatively impact your retirement

Inflation could pose a problem for you in retirement in a few different contexts. First, there's Social Security.

Social Security is eligible for an annual cost-of-living adjustment, or COLA, to allow those benefits to keep pace with inflation. But those COLAs have historically fallen short, causing seniors to lose buying power year after year rather than maintain it.

Then there's your savings to worry about. Even if you amass a decent chunk of wealth in your 401(k) or IRA, if your money isn't invested in a manner to keep pace with inflation, your savings may not go as far as expected once you need to tap them.

How to avoid issues with inflation as a retiree

If you want to make sure that inflation doesn't upend your retirement finances, there are a couple of things you ought to do. First, invest your savings aggressively when retirement is far off.

Loading up on stocks can be a risky prospect because the market has a history of volatility. And it's natural to be worried about taking losses in your portfolio. But if you go heavy on stocks, you might also snag a high enough return to enter retirement with a huge pile of money. And when you're looking at a decades-long investment window, there's time to ride out market downturns.

In fact, let's say you were to contribute $400 a month to a retirement plan over 40 years that generates an average annual 8% return. That return is a bit below the stock market's average. At that point, you'll be looking at over $1.2 million. A more conservative 6% return will leave you with around $743,000 instead, which is a nice sum in its own right, but a sum that won't go quite as far.

Next, commit to staying invested in stocks during retirement. It's best to scale back in that regard once that milestone starts getting closer. But it could be a good idea to keep about 50% of your portfolio in stocks to kick off retirement and put the other 50% into more stable assets, like bonds.

If you dump your stocks completely as retirement nears, your portfolio may not continue to generate the growth you need it to for inflation-beating purposes. So it's a good idea to stay invested in stocks, but also maintain a decent cash pile as a retiree in case you need to leave your portfolio untapped for an extended period to ride out a market decline.

Inflation isn't something that's likely to go away. So it's important to inflation-proof your retirement plan and portfolio so that it doesn't hurt you once your career comes to an end.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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