Managing the Impact Inflation has on Retirement

From 1974 through 1981, inflation reached double-digit levels. Thankfully, it hasn’t been much of an issue for the past several years, and currently, it’s at historic lows. When inflation rises, it can wreak havoc on the economy. Although it affects multiple segments, perhaps two of those that are hit the hardest are fixed-income living and retirement.

Inflation creates a serious problem for retirees. It can make maintaining a good lifestyle difficult. It can also reduce the amount of money that people have in savings, money they depend on for retirement and during a fluctuating market.

How Inflation Affects Buying Power

It’s staggering to learn how just a 1 percent increase in inflation would reduce a person’s buying power by 50 percent. The following shows the number of years it would take for different percentages to impact purchasing power.

  • 1 percent – 72 years
  • 2 percent – 36 years
  • 3 percent – 24 years
  • 4 percent – 18 years
  • 5 percent – 14.4 years

The good news is that the annual rate of inflation has remained below 2 percent in recent years. However, since WWII ended, it has averaged 3.8 percent. It’s hard to imagine, but at an even lower 3 percent interest, it only takes 24 years to lose 50 percent of one’s buying power. For instance, at age 65, an individual’s spending power would be reduced by 50 percent by the time they’re 89.

Cost of Living for Social Security Recipients

In 2019, Social Security beneficiaries saw an increase of 2.8 percent for the cost of living. To determine yearly increases, the Social Security Administration relies on the Consumer Price Index Wages portion. They use the third quarter period from one year to another as a benchmark for any changes that Social Security recipients see.

Mitigating Inflation Problems in Retirement

While there’s nothing anyone can do about the rate of inflation, retirees can take certain steps to protect themselves from its impact. The following are some options to lessen any impact that inflation has on retirement.

Delay Social Security Benefits

People should hold off claiming their Social Security benefits as long as possible. The earliest eligibility age is 62. However, the full retirement age is 66 if born before 1955 and 67 for those born in the year 1960 or later than that.

If someone claims their Social Security benefits at 62 with a full retirement age of 66, they would see a 25 percent reduction in the money received. If someone claims benefits at 62 with a full retirement age of 67, the loss of benefits increases to 30 percent.

To get more in benefits, individuals want to wait until their full retirement age to make a claim. Remember, people get an 8 percent annual increase until the age of 70, which is the highest it can go. If you can wait until age 70 without running into any cash shortfalls, this is usually the best strategy that maximizes total payouts.

You can actually figure out the best time to take Social Security by using a broad and detailed retirement calculator such as the WealthTrace Retirement Planner or a quick and easy Social Security calculator like Bankrate’s Social Security Benefits Calculator.

Start a Health Savings Account

A great way to pay medical expenses during retirement is to start a Health Savings Account. People should do this if they’re still employed and not on Medicare. Now, for someone to contribute to a Health Savings Account, they’re mandated to have a high-deductible health insurance policy either through their employer or one they choose independently.

A key benefit to a Health Savings Account is that money contributed is pre-taxed.  Also, for qualified medical expenses such as some long-term care, Medicare premiums, and more traditional dental and medical treatments, they can make withdrawals tax-free.

The goal is to use a Health Savings Account as an additional retirement fund while still working to cover any out-of-pocket expenses. Also, people need to let the balance in this account grow. Last year, the maximum contribution for an individual was $3,500 and for a family, $7,000. Anybody that is 55 or older can contribute an additional $1,000.


Another way to manage the impact of inflation on retirement is to invest. Some individuals reduce their allocations to just stocks and other forms of aggressive investments upon retirement. However, with life expectancy much higher today than years ago, people shouldn’t wait to start investing. The sooner, the better.

As part of a retirement portfolio, people shouldn’t overlook the value of stocks. That’ll help them stay ahead of inflation but without spending power and saved money diminishing. Other options include real estate investment trusts and inflation-protected Treasuries. Bonds are another possibility since they’ve historically provided protection during a down market, and they don’t correlate much with stocks.

Simply put, people want to make sure their “real returns” beat inflation. For instance, if inflation is at 3 percent and an individual’s investments earn 4 percent, the real return is 1 percent. That means the individual just lost ground to inflation and his or her actual returns that can be used are only 1%.

Account Withdrawals

Individuals also need to efficiently manage withdrawals to minimize the impact of taxes. That alone can result in significant tax savings, which yields more spendable income while fighting inflation. Most people should withdraw from taxable and Roth accounts first and after that withdraw from retirement accounts where they are taxed on the withdrawals.

Long-term Insurance

When nearing retirement age, people should think about buying an insurance policy for long-term care. That way, they’ll have protection should they or their spouse need it. Without insurance, the cost of long-term care can quickly devour savings and retirement accounts. The key is to choose a policy with a rider that specifically protects against inflation.


Although retirees face several risks, inflation is at the top of the list. Especially during periods of market fluctuation, people in retirement can suffer from great losses. The best course of action is to work with a professional financial advisor who can devise a plan to mitigate the impact of inflation on retirement.

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