Photo by Andrea Piacquadio
Retirement is a significant hallmark and it represents a time when you or a loved one can finally enjoy the rewards of all the years of hard work. When someone reaches retirement, it gives a sense of freedom. One may want to visit places they’ve never seen, throw a memorable retirement party, or take up a new hobby. However, retirement also encompasses protecting your savings from inflation.
As prices skyrocket, the value of your money decreases–substantially impacting your financial standing during retirement. We’ll explore the effect inflation has on retirees, the impact of inflation on savings, and provide strategies to protect your finances from its adverse effects.
What is Inflation?
Inflation happens when the cost of everyday products and services climbs over time. Things cost more all across the board, from homes and groceries to gas and clothing. The Federal Reserve usually aims to have an inflation rate of approximately 2% per year, which is often a signal of a thriving economy. Having said that, the rate of inflation has spiked in recent times.
What Effect Does Inflation Have on Retirees?
The soaring prices can substantially diminish your spending power, and this is especially true for those who are living on a fixed income. When someone is working, they can properly budget for the rising costs, and chances are they will see salary increases along with inflation. However, inflation can result in dire consequences for retirees. In 2022, retirees saw a nearly 6% cost-of-living-adjustment to their monthly social security benefits. While the adjustment can help retirees to a certain degree, it’s unlikely that it will offset costs in the long run.
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Impact of Inflation on Savings
There’s a huge impact of inflation on savings. Over time, the purchasing power of the money you’ve saved up for retirement will start to dwindle because of inflation. Surging costs can create a gap between expected income and what you actually need to pay your monthly expenses.
Retirees spend larger portions on housing, which increases at a faster rate than other expenses. Additionally, healthcare costs for retirees are three times greater than the average working adult. If you end up needing to take out larger amounts from your retirement savings frequently, it could hinder the longevity of your retirement plan.
Strategies to Protect Your Finances
Photo by Andrea Piacquadio
As prices continue to rise over time, there’s an impact of inflation on savings that limits your purchasing power, which is often detrimental if you’re living on a fixed income. We’ll explore valuable strategies that can help you fend off inflation and secure your financial future during the retirement years.
Review Your Budget
Proper budgeting is crucial to cutting costs and managing expenses. Try to adjust your budget and scale back on non-compulsory expenses such as home renovation projects and vacations. You can also make the most out of your budget by conserving energy usage in your home. If you’re able to, consider taking on some part-time work to help narrow the income gap.
Maintain a Portfolio of Stocks and Annuities
Stocks can be beneficial to your finances as they typically yield annual returns that surpass inflation. When you own stocks, you’ll have access to one of the most powerful tools to reduce the impact of inflation on savings. Another powerful tool to take advantage of is an annuity, which guarantees a fixed income for a certain period in a contract or even for life.
Have Cash Cushioning
It’s always good to have an emergency fund or a cash cushion. Even though inflation decreases your spending power over time, having access to cash help you pay for inevitable expenses during times of rising costs. Even more so, a cash cushion can reduce the number of times you’ll need to withdraw from your investments.
Long-Term Care Planning
Among the most substantial costs for retirees is long-term care. One way to counteract the costs of healthcare is to contribute as much as possible to a health savings account. The account, also known as an HSA, allows you to carry over funds each year and has attractive benefits such as tax-free withdrawals for qualified expenses, pre-tax contributions, and tax-free growth.
Another strategy to consider in long-term care planning is a life insurance policy with a long-term care benefit rider. This type of policy can help offset healthcare costs, which provides an extra layer of security. You can also safeguard your assets from long-term care expenses by way of a trust fund. By using these options, you can ensure a steady foundation for your long-term care needs while maintaining your financial well-being.
Inflation can have a monumental impact on retirement savings and it’s powerful enough to deteriorate the purchasing power of your savings over time. Fortunately, there are strategies you can use to protect your finances from the damaging effects of inflation. From adjusting your budget to maintaining an investment portfolio, you can take the necessary steps to secure your financial future.
Suncrest Senior Living offers a wide range of memory care and assisted living services throughout Southeast Michigan. Learn more about Suncrest by contacting us online or calling 248-207-5378.
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