retirement savings  |  may 11, 2023

How to Help Protect Your Savings From Inflation When You’re Planning for Retirement

With some careful planning, you can mitigate the impact of inflation on your retirement savings.


Key Insights

  • Inflation can increase the risk of running out of money during retirement.

  • Effective retirement strategies will account for inflation.

  • A portfolio’s asset allocation is an important tool for dealing with inflation over the long term.

Judith Ward, CFP®

Thought Leadership Director

When inflation rises, many preretirees may wonder how they can ensure that their retirement savings will cover their cost of living in the future. For investors who are planning for retirement, the good news is they still have time to make any necessary adjustments. They may even find the plan they have in place is already sufficient to mitigate the impact of inflation.

How Inflation Affects Retirement Savings

The Federal Reserve generally considers an inflation rate of 2% as acceptable to maintain a healthy economy. At this rate, a dollar you save today will be worth about 98 cents next year—and then less again the year after that. To overcome this effect, your retirement savings would need to grow at a 2% annual rate to maintain your spending power into the future, provided inflation remains at 2%.

When inflation is higher, the buying power of your savings declines more rapidly. Given that it is impossible to know what inflation will be like in the future, it is important to build a margin of safety into your savings plan. This means carefully considering your investment allocation and your retirement timeline. Growth beyond inflation is necessary to ensure that you accumulate the savings you will need to support yourself in a retirement that could last several decades.

“T. Rowe Price generally assumes a 3% inflation rate when building financial plans for its clients, which is lower than recent levels but, at the same time, is a reasonable long-term assumption,” says Judith Ward, CFP®, a thought leadership director with T. Rowe Price. “Inflation puts more pressure on portfolio balances during retirement by decreasing their purchasing power. We believe the key is to take the long view and build your retirement savings to withstand inflationary environments.”

Preparing for Retirement with Inflation in Mind

One of the best ways to manage the corrosive effects of inflation in retirement is to plan ahead. These retirement planning strategies can help:

1. Keep your retirement savings on track.

T. Rowe Price recommends that you have about seven times your income saved at age 55. By age 60, you should have about nine times your income. If you find yourself lagging, consider making catch-up contributions. In 2023, anyone age 50 or older can contribute an additional $7,500 to their 401(k) plan each year, as well as an extra $1,000 to Traditional and Roth IRAs combined.

2. Account for inflation in your asset allocation.

Maximizing your contributions is one way to help offset the potential effects of inflation; so is making smart choices about how to invest your savings. “Asset allocation is a primary driver of a portfolio’s performance over time, and stock returns have generally stayed well ahead of inflation over the long term,” says Ward. (See “Equity Investments Can Help Mitigate Inflation”.)

Equity Investments Can Help Mitigate Inflation

Total returns from stocks have historically outstripped the average inflation rate
over time.

Total returns from stocks have historically outstripped the average inflation rate over time.

*Ended 3/31/2023.

Sources: T. Rowe Price, S&P, and the consumer price index (CPI). Data from 12/31/1969–3/31/2023. Past performance cannot guarantee future results. It is not possible to invest directly in an index. Chart is for illustrative purposes only.

In general, the longer an investor’s time horizon, the more of a portfolio should be held in stocks. As investors near and then transition into retirement, adding bonds can help dampen the short-term ups and downs of the market, and an appropriate mix of stocks and bonds can help provide the growth potential needed to maintain real purchasing power. (See “Model Asset Allocations for Investors in Their 50s and 60s” below.)

Model Asset Allocations for Investors in Their 50s and 60s

As an investor nears retirement, the portfolio should typically move gradually from more aggressive to more conservative.

Examples and recommended asset allocation of stocks, bonds, and cash in your 50s and 60s.

Investors concerned about inflation risk or seeking real growth could look for a combination of growth-oriented and inflation-sensitive investments in strategic allocations within their current mutual fund portfolios or might seek out funds with some of these underlying investments. Asset classes that potentially perform well in rising inflation environments include real assets equities, Treasury inflation protected securities (TIPS), and higher-yielding bonds. (See “Investment Performance Varies Across a Range of Market Environments” below.) Holding some inflation-sensitive assets within your portfolio may help to smooth real returns and provide diversification benefits through periods of higher inflation. Check your portfolio for exposure to these types of investments. You can also work with a T. Rowe Price advisor or other financial professional on a personalized investment plan. Of course, diversification cannot assure a profit or protect against loss in a declining market.

Investment Performance Varies Across a Range of Economic Environments

The investments below tend to exhibit real portfolio growth potential as indicated in their respective economic growth and inflation environments. Our investment professionals may consider these dynamics in their underlying allocations.

Performance can vary for different investments in changing growth and inflation environments. Our investment professionals may consider these dynamics in their underlying allocations.

Source: T. Rowe Price. The diagram above is for informational purposes only and does not represent any investment recommendations.

3. Carefully consider Social Security claiming decisions.

Social Security benefits are a guaranteed source of income that is adjusted each year to account for changes in the cost of living. These increases make Social Security benefits one of the best inflation hedges and a valuable source of income in retirement. The longer you can wait to start receiving your benefits payments, the higher that guaranteed, inflation-adjusted income source will be. (See “The Benefits of Delaying Social Security” below.) Couples, especially, have an opportunity to coordinate their claiming decisions to maximize this income source and a survivor benefit in retirement.

The Benefits of Delaying Social Security

Each year you delay claiming your benefits may translate into a permanent increase in your benefit amount.

Comparisons of how delaying Social Security benefits can maximize retirement savings withdrawals.

Social Security payments are calculated using the Quick Calculator on the website. Assumes an individual who is age 62 in 2023 (with a full retirement age of 67 years) and is continuing to work and earn $100,000 each year until claiming benefits. All figures reflect current dollars. Actual benefits would be higher to reflect future adjustments for inflation.

4. Consider delaying retirement.

Being open with your plans can also help. For example, delaying retirement or taking on a part-time job to supplement your current income could create more flexibility in growing your retirement savings or reducing your initial withdrawals. The longer you avoid drawing down your retirement savings, the more time you’ll have to take advantage of compound growth potential.

5. Adjust your expectations for spending in retirement.

“Research by T. Rowe Price shows that real spending, on average, decreases throughout retirement,” says Ward. In fact, 70% of retirees manage their money to preserve their assets.1 You can help make sure your savings will support you through retirement by planning to adjust your retirement withdrawals based on how conditions unfold in the future. This mindset may benefit your retirement plan even in the face of inflationary environments.

Planning Today Can Better Prepare You for the Future

Ultimately, inflation is one of many risks you will need to consider as you prepare for retirement. Having an appropriate plan in place to build your wealth can help you retire comfortably and on your terms. To be sure your plan remains on track, it’s also important to monitor your retirement portfolio at least annually so that you can adjust as needed.

Asset Allocation Models:

Within Stocks: 60% U.S. Large-Cap, 25% Developed International, 10% U.S. Small-Cap, 5% Emerging Markets
Within Bonds: 70% U.S. Investment Grade, 10% High Yield, 10% International, 10% Emerging Markets
Within Cash: 100% Money Market Securities, Certificates of Deposit, Bank Accounts, Short-Term Bonds

These allocations are age-based only and do not take risk tolerance into account. Our asset allocation models are designed to meet the needs of a hypothetical investor with an assumed retirement age of 65 and a withdrawal horizon of 30 years. The model asset allocations are based on analysis that seeks to balance long-term return potential with anticipated short-term volatility. The model reflects our view of appropriate levels of trade-off between potential return and short-term volatility for investors of certain ages or time frames. The longer the time frame for investing, the higher the allocation is to stocks (and the higher the volatility) versus bonds or cash. While the asset allocation models have been designed with reasonable assumptions and methods, the tool provides models based on the needs of hypothetical investors only and has certain limitations: The models do not take into account individual circumstances or preferences, and the model displayed for your investment goal and/or age may not align with your accumulation time frame, withdrawal horizon, or view of the appropriate levels of trade-off between potential return and short-term volatility. Investing consistent with a model allocation does not protect against losses or guarantee future results. Please be sure to take other assets, income, and investments into consideration in reviewing results that do not incorporate that information. Other T. Rowe Price educational tools or advice services use different assumptions and methods and may yield different outcomes.

1T. Rowe Price Retirement Savings and Spending Study, 2021.

Important Information

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. Past performance cannot guarantee future results.

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