Personal Insights

Protecting your retirement plan against inflation

Small spikes in the inflation rate can have a big impact on your long-term wealth plans. Here’s how you can protect your retirement plan against inflation.

For the average American household, the impact of inflation may be felt in a variety of ways, from the price of rent to the cost of groceries. For high-net-worth individuals, however, the impact may not be as immediately noticeable — and that can lead many to dismiss the potential impact it can have on their long-term goals.

“Inflation acts as a sort of invisible tax on wealth, adding incremental cost to the items we purchase every day,” explains Bryan Koepp, senior vice president and wealth planning executive for Regions Private Wealth Management.

As inflation rises, your purchasing power recedes, requiring you to spend more money to maintain your current standard of living. This gradual increase in day-to-day expenses can interfere with savings plans over time, resulting in unexpected financial challenges down the road.

Unfortunately, those who dismiss the potential impact of inflation could be putting their retirement plans at risk.

How inflation impacts retirement planning

Many investors think about inflation in terms of asset management: If the value of their portfolio is growing at a rate lower than inflation, the returns will diminish over time. However, many are less likely to assess how inflation will affect their long-term savings and retirement plans.

According to Koepp, inflation higher than 3.5% can put stress on current cash flow, potentially impacting how much you can save for retirement. And if your financial plans haven’t been updated recently, this spike in inflation can have an even greater impact on your retirement plans by reducing your spending power in retirement.

“If you created or adapted your retirement plan in the past five years when inflation rates were under 2.5%, chances are your savings strategy and cost of living expectations will no longer be on target,” he explains.

In Episode 35 of Regions Wealth Podcast, Wealth Advisor Andrew George shares strategies for creating a retirement spending plan.

How to adjust your retirement plan for inflation

If the inflation rate results in a higher cost of retirement living than you’d initially anticipated, you’ll need to either save more money to accommodate your lifestyle goals or adapt your retirement plans in the following ways:

1. Adjust your expectations for post-retirement housing and travel.
2. Plan ahead for increased healthcare expenses in retirement. 
3. Reassess your charitable giving goals.
4. Rethink how much money you will be able to put into trusts for future generations.

“We encourage all of our clients to assess their wealth strategy at least annually with their wealth advisors, as well as any time there is a significant shift in their personal life or the economy,” Koepp says. This regular assessment will help ensure that the wealth strategies your advisor put in place will still help you achieve your goals and allows them to make adjustments promptly to mitigate delays that can create unexpected financial consequences.

The current surge in inflation is one of these times.

“A wealth advisor can help you determine how rising inflation will impact your long-term wealth strategy by testing your cash flow assumptions against varying inflation models,” says Koepp. That assessment can help you determine what changes, if any, you need to make to adapt.

Ultimately, the solution will be unique for each wealth plan and should be grounded in each individual’s personal goals, rather than a specific dollar amount.

1. Consider the long-term impact

Some cost of living adjustments may appear minor, but it’s crucial to consider the impact over time. Spending an additional $1,000 per month in retirement can add up to a quarter of a million dollars over the course of 20 years — a significant deficit.

2. Focus on your goals

According to Koepp, focusing on a specific dollar amount is a common mistake many individuals make when planning for the future. Instead, you should begin the process by looking at what you want to accomplish with your money. Taking this approach will make it easier to calculate how much you will need to support your goals, and what you can do to get there.

3. Don’t reinvent the wheel

If you and your wealth advisor determine that a change needs to be made, it doesn’t mean you need to tear up the original plan and start from scratch. Rather it may just require some minor tweaking to your plan, your savings goal and/or the time it will take you to achieve that goal.

For example, if you know where and how you want to live in retirement, your wealth advisor can calculate how inflation will impact your anticipated housing and lifestyle costs to determine the new monthly cash flow required to support it.

Adjusting your investment strategy for inflation

Reevaluating your retirement plans on a frequent basis will ensure you have enough time to make the necessary changes. These may include increasing your monthly contributions to retirement savings, delaying time to retirement so you can build a larger nest egg or adjusting your anticipated lifestyle to reduce expected monthly costs.

It can also be an opportunity to consider changes to your investment strategy that will potentially help you build more wealth to support future retirement goals. Once again, the impact of inflation should be taken into account to ensure the projected returns are beneficial.

One area to consider in this rising inflation environment is leveraging credit rather than using personal savings for investments.

That can generate added value. If you can borrow money at an interest rate that is lower than the inflation rate, it’s comparable to getting a discount on the asset being purchased. It is an opportunity to leverage money at sub-inflation rates to support inflation-resistant investments, including rental properties, which are a popular investment option in a high-inflation economy.

Preparation is key

Regardless of how you adapt your wealth plan and investment strategies to accommodate a high inflation environment, the key is to be proactive. Whenever your personal financial situation changes or the economy experiences upheaval, talking to your wealth advisor about how these changes will affect you is the best way to keep your financial plans on track.

Whether you have $200,000 saved or $20 million, inflation will impact your retirement goals. Making adjustments today ensures you have the time, tools and insights to make those goals a reality.

Looking for additional guidance? We’re here to help. Connect with a Wealth Advisor today.