Don't let inflation derail your retirement
Are you concerned about inflation? If so, you're not alone. Inflation has driven up prices on everything from groceries and utilities to used cars and airline fares. Unfortunately, many consumers are dealing with rising costs in ways that can put their futures at risk.
According to a U.S. News & World Report survey, 41% of people stopped putting money into retirement savings in 2022 due to cost-of-living hikes, and 32% withdrew some of their retirement savings to keep up with inflation.1 While desperate times call for desperate measures, coping with inflation by saving less for retirement is a bad idea that can have long-term financial repercussions.
The problem with saving less for retirement
Consider two investors: Investor A saves $12,000 per year beginning at age 30, and Investor B saves $36,000 per year starting at age 45. Assuming a 6% rate of return and annual compounding, Investor A will have $1,337,217 at age 65, while Investor B will have $1,324.281.
In other words, although Investor A saved less than Investor B, Investor A will have more money when they retire because they started earlier and have the power of compound interest on their side.
Putting less money into your retirement account — or even taking early withdrawals — means missing out on that potential growth opportunity. And losing out on that growth over time could even mean running out of money in retirement.
How to deal with inflation without risking your retirement
Here are a few strategies for dealing with higher costs to ensure inflation doesn't derail your retirement plans.
Saving less for retirement means missing out on potential growth opportunities—it could even mean running out of money in retirement.
Look for ways to earn more
One of the best ways to combat inflation without sacrificing your retirement savings is to look for opportunities to earn more. Whether you're a full-time employee, a freelancer, or an entrepreneur, there are many ways to increase your income.
If you're employed, consider asking for a raise. According to Salary.com, the median raise was 4% in 2022, and a quarter of employers plan on giving increases in the 5% to 7% range in 2023.2 If your compensation hasn't kept up, schedule time with your boss to discuss your accomplishments and make a case for why you need a raise. If that doesn't work out, consider looking for other employment opportunities or starting a side hustle.
If you're self-employed, raise your rates and market yourself to new clients. You can also look into ways to increase the value of your services or product offerings.
Cut expenses elsewhere
Cutting or reducing other spending categories can also help you deal with inflation without sacrificing your retirement savings. Start by tracking your spending, then find creative ways to reduce those costs without impacting your life too much.
For example, if grocery shopping is a considerable expense for you, try meal planning and bulk buying to get the most out of your budget. If you dine out several times per week, start cooking at home more.
If you were planning on making a big purchase this year — such as a new car — consider delaying it for a year. Prices for new vehicles are expected to go down by 2.5% to 5% in the coming year, while prices on used cars are expected to fall by 10% to 20%,3 so waiting could mean getting a better deal.
Look for tax-advantaged retirement savings options
Investing in a 401(k) or traditional IRA is another way to maximize your retirement savings and beat inflation. Contributions to a 401(k) or traditional IRA reduce your taxable income,4 so those tax breaks allow you to save more with the same out-of-pocket costs.
Additionally, if your 401(k) comes with matching employer contributions up to a certain percentage or dollar amount, you'll get an instant return on your investment.
If you're self-employed, keep in mind that you're not limited to just IRA contributions. Talk to your accountant about how a SIMPLE IRA, a SEP IRA, or an Individual 401(k) may help you reduce your taxable income — and also boost your retirement savings.
Regardless of your strategies, it's important to remember that saving for retirement should be your top priority. And if you need help dealing with inflation and its effects on your finances, consider seeking out the help of a financial advisor. They can offer advice and guidance on protecting your retirement savings and creating the comfortable retirement you deserve.
Important disclosure information
- Tori G. Roughley, “U.S. News & World Report Survey: Retirement and Inflation," U.S. News & World Report, published January 9, 2023, accessed February 16, 2023. Back
- Salary.com, “Trending Salary.com Data Indicates the Days of Annual Salary Increases in the 3% Range Are Over," published September 6, 2022, accessed February 16, 2023. Back
- Selena Fragassi, “The Best Month to Buy a Car in 2023," Yahoo, published January 27, 2023, accessed February 16, 2023. Back
- FINRA, “What Does It Mean to Be Pre-Tax or Tax-Advantaged?" published October 26, 2022, accessed February 16, 2023. Back
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