The Hidden Factor That Could Potentially Tank Your Retirement Fund

Stressing about retirement can be emotionally draining not to mention time consuming. From knowing what exact age to fully retire to calculating what your Social Security benefits might be every month, retirement can require a lot of pre-planning. Not to mention, for those nearing their retirement age, all of this retirement planning is in addition to the stressors, obligations, and financial concerns of everyday life.

However, despite the added pressure of planning for retirement, it can be extremely important in determining both your lifestyle and financial situation in your golden years. It's worth mentioning that the amount of money that Americans think they need to retire comfortably goes up every year. Not to mention how changing economic concerns could push more and more baby boomers (and even Gen X) out of their current geographic areas in search of lower costs of living. To add to this, many Americans have a significant disconnect between how much they think they will rely on Social Security compared to how much they will. For instance, in a 2024 survey from the Bipartisan Policy Center, just 49% of non-retired respondents reported expecting Social Security to be a major source of their income while 82% of actually retired respondents reported Social Security was a major source of income. While Social Security can be an important part of your retirement planning, your other retirement accounts can be equally as significant. This is why it's important to realize how much inflation might be hurting your retirement goals.

It's important to remember that Social Security is not intended to be the singular source of income for retirees. Whether your work offers 401(k) plans or you have your own Roth IRA or investment accounts, having a mix of different account types can be the best way to prepare for retirement. However, these account types (and the money housed in them) are also more susceptible to economic fluctuations like inflation. At this point, most consumers are probably sick of hearing about inflation. From increased grocery prices to housing costs, inflation has affected most Americans wallets during the post-pandemic years. While inflation is not only hurting your financial situation in the present, it could also be having a significantly negative impact on your future retirement as well. This is because of how inflation affects the value of both your current income and your savings through something known as purchasing power.

Your purchasing power as a consumer is tied to the amount of goods or services that your dollar can buy at a certain time. When inflation goes up, the amount of goods you can buy with your money goes down. When inflation stays up long term, the money you have saved in an account will effectively be worth less than it did when you first placed it into your savings accounts. This is part of why it is so important to use high yield savings accounts with APY rates that at least meet (but hopefully outpace) the current inflation rate.

Beyond your personal savings accounts, it is also important to ensure that your retirement accounts have some way of combating inflation. While Social Security is adjusted for inflation every year through cost of living adjustments (keep an eye on COLA rates every year since they can change your tax liability), not all 401(k) or IRA accounts offer that same courtesy. With that in mind, compound interest can be the only real way to combat inflation when it comes to retirement ravings. Maxing out your yearly contributions, and starting your savings journey early are the only ways to optimize compound interest in a way that can help to offset how inflation will affect your retirement savings.

If you are someone who tends to err on the side of caution and prefers cash over higher-risk investment options, bonds could be a useful way to keep up with inflation while ensuring you stay within your comfortable risk level. Similarly, having diverse income streams (i.e. rental income or even a part time job in addition to retirement savings income and Social Security) can help ensure your income keeps up with or beats inflation levels. Perhaps the most significant inflation influenced expense that retirees should steer clear of is renting. Since rental rates fluctuate significantly with inflation, those on fixed incomes should lean towards more locked in housing prices through ownership. However, retirees should also keep in mind the high cost of living in certain states, and whether they'll really be able to continue affording their home long-term.