How to Factor Inflation Into Your Retirement Planning

Marianne Hayes
Nov 15, 2022

Amid the cost-of-living increases, it’s understandable if you have concerns about your own nest egg — but the news isn’t all bad. Photo credit: PeopleImages/Getty Images

Inflation has certainly been the primary buzzword for 2022, and its impact is squeezing not only our current budgets but also our financial plans for the future. According to Northwestern Mutual’s 2022 Planning & Progress Study, Americans now believe they will need $1.25 million for a comfortable retirement — a 20 percent increase since 2021.

“It's a period of uncertainty for many people, driven largely by rising inflation and volatility in the markets. We've also seen upticks in spending as people have resumed a sense of normalcy in their lives following the earlier days of the pandemic,” said Christian Mitchell, Executive Vice President and Chief Customer Officer at Northwestern Mutual. “These factors are leading many people to recalibrate their thinking about how much they'll need to retire and how long it will take them to get there."

Amid the increasing cost of living, it’s understandable if you have concerns about your own nest egg. Luckily, the news isn’t all bad. Here’s what to know about the impact of inflation on retirement.

IRS contribution limits are increasing

Beginning in 2023, you’ll be able to put more money into tax-advantaged retirement accounts, which could help you boost your retirement savings. 401(k) and traditional IRA contributions can also reduce your taxable income during your working years.

Along with larger retirement contribution limits, the IRS is increasing the standard deduction and tax brackets, which could help you save on taxes and allow you to put away more for retirement.

Social Security payments are also set to increase

In October, the Social Security Administration announced the largest increase in more than 40 years for its annual Cost-of-Living Adjustment (COLA). Benefits checks will go up 8.7 percent for 2023 — about $135 per month for most recipients.

This is certainly good news for those who are receiving Social Security (or will be in the coming years) as benefits are guaranteed and unaffected by swings in the market. That’s why many people count on Social Security for a base of reliable income in retirement.

Rising costs are a key reason to build a strong retirement plan

A retirement plan is a blueprint for how you’ll generate reliable income when you’re no longer working. The plan will help show you how you’ll eventually turn your savings into income in retirement.

"It's one of those questions on so many people's minds: How long should I expect to work in order to save enough for retirement?" said Mitchell. "It's really difficult to answer because there are all kinds of considerations to factor in."

There are a number of retirement risks that a plan can help you mitigate — inflation is just one of them.

Retirement risks

Market volatility
Longevity
Health care
Long-term care
Inflation and taxes
Legacy

Generating income in retirement

Financial professionals understand these risks and can help you create a personalized roadmap for living the life you want in retirement. They can also help you set a savings target based on how you envision spending your golden years. By using a range of financial options that reinforce each other, they can prepare you for the potential risks to your retirement income. Those options may include:

Social Security benefits: You can begin taking Social Security benefits at age 62, but you’ll get more if you wait until at least your full retirement age. That’s 67 for folks born in 1960 or after. The state of inflation is something else you may want to consider before you decide when to claim. Social Security helps you create a base of income that will last for as long as you live. And since benefits increase with inflation, it will help you keep pace with rising prices over time.
Investment accounts: This includes money you have saved in a 401(k), IRA or a brokerage account that will allow you to continue to invest during retirement. Long-term investments are a crucial way to continue growing your nest egg amid inflations as they generate growth over a period of time.
Cash savings: Having the right amount of cash set aside can help you manage taxes and deal with market volatility.
Permanent life insurance: The accumulated cash value from a whole life insurance policy can supplement your retirement income. It’s guaranteed to grow, which makes it a great tool to help weather market volatility. It can also supplement the amount of cash that you need to keep in a bank account — which is money that could lose value during inflationary times. If needed, you will be able to access the accumulated values through surrenders (withdrawals) or loans (and pay them back). These actions can have an impact on the death benefit, which can be a decision made based on whether the priority is to spend more or leave a larger legacy.
Pensions: Although less common than they used to be, if you have a pension through an employer or trade association, it can provide guaranteed income for life.
Income annuities: After purchasing an annuity from an insurance company, you’ll receive steady income payments in retirement — typically for the rest of your life. This also helps to weather market volatility and prepare you for the risk of living too long.

A retirement plan can show you how these financial options can work together to create reliable income for you. By using these options together along with additional strategies, you can minimize some of the most common risks to your retirement savings — including inflation.

No matter what the economic environment is like when you retire, having a comprehensive plan in place is the best way to ensure your peace of mind.

All investments carry some level of risk including the potential loss of all money invested.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.