Last October, the consumer price index (CPI) climbed above 6% for the first time in more than 30 years. As it did, Business Insider published an article detailing a variety of ways inflation was “annoying” – including that hotels were ending turndown service.
That is annoying.
If you were someone who last year could view inflation as a mere annoyance, I am happy for you. But if we fast-forward to the present day and view the current economic landscape, it seems clear that inflation now is a bona fide problem for a lot of Americans.
The numbers don’t lie. I recently shared data that reveals more than one-third of American households are struggling to pay typical expenses. It’s easy to understand why. CPI for May jumped 8.6%. That’s the largest year-over-year increase in more than 40 years.
Headline CPI tells only part of the story. As of Friday, June 10, the national average price per gallon of gasoline reached $4.98. That’s a year-over-year increase of nearly 60%. And just as we’re all familiar with how gas prices have soared, we also know that food prices have climbed substantially. The food-at-home index – measuring grocery store and supermarket food prices – climbed at a year-over-year rate of 11.9% in May. It’s the biggest jump in that index since April 1979 during the economically historic decade known as the “Great Inflation.”
But people are not just consumers. They also are savers. And as challenging as inflation is for us with day-to-day expenses, it’s also having a significant impact on our ability to prepare for – and maintain in – retirement.
I’m not talking only about the degree to which inflation can diminish the purchasing power of accumulated savings, as significant as that is. I’m also referring to the reality that high inflation right now is forcing savers to reduce – or eliminate – retirement plan contributions.
According to one recent survey, fully 25% of Americans say current inflation will force them to delay retirement. The results clarify that an inability to save enough (and often enough) is a big reason why. And another survey found two-thirds of respondents have concerns about inflation’s impact on their ability to continue saving.
We’re going to discuss all of this in greater detail shortly. But the overarching message is that inflation has the potential to hinder retirement security in a variety of ways. Given that reality, it behooves savers – particularly those in or approaching retirement – to figure out how to reduce inflation’s effects any way they can. That might include adding certain assets to financial holdings – specifically, assets historically that have helped soften the impact of constant elevated prices.
I’m going to talk about that, as well. But first, let’s delve into these survey numbers and findings.
Last August, when the inflation rate was written off by some as “annoying,” we learned American seniors were getting concerned about the impact elevated prices might have on their retirement.
A survey conducted by Global Financial Atlantic Group during that month showed that 71% of savers aged 59 to 75 felt inflation would “negatively affect” their retirement nest eggs. And that poll was conducted in a month when the inflation rate was nearly 40% lower than it is right now.
For sure, the long-term effects of inflation on savings’ purchasing power can be significant. Over 20 years, an inflation rate of just 3% can reduce the purchasing power of a $500,000 lump sum by nearly half.
And it would be wise not to underestimate the impact of high inflation over just the short term. U.S. inflation has averaged roughly 6.5% since April 2021. That means an account valued at $500,000 last April has lost a little more than $35,000 in purchasing power through today. If 6.5% inflation was to persist for 20 years, the purchasing power of that $500,000 would drop to roughly $142,000 over that period.
But, as I noted earlier, loss of purchasing power is just one way inflation can cause problems for retirement savers. Consumers faced with paying much-higher prices for goods and services can find their ability to fund retirement accounts “crowded out” by other expenses.
Earlier, I referenced a survey that revealed one-quarter of Americans say high inflation will force them to put off retirement. This information stems from research conducted by BMO Harris Bank from March 30 to April 25 of this year.
Sixty percent of those survey respondents said inflation has “adversely affected” their financial circumstances, with one-quarter of respondents saying the impact has been “major.” According to the results, inflation has forced 36% of Americans to decrease their savings and 21% to pare down their retirement savings.
In an article for CNBC about the survey results, Paul Dilda, head of consumer strategy at BMO, said, “We haven’t seen this level of inflation in a very long time, and it’s very daunting.” Dilda added that “many people in or near retirement may not have considered this surge in prices in their financial plans, which has thrown off budgets and timelines as well.”
What this survey reveals is a sort of “Part B” to the way inflation is impacting retirement saving: by constraining savers’ abilities to continue making contributions to retirement plans. Obviously, if a saver is forced to reduce – or eliminate altogether – ongoing retirement plan contributions, that can have a significant impact on the eventual value of his or her account(s).
As a confirmation, another survey – this one conducted by Voya Financial – revealed that 66% of respondents said they’re worried about how inflation will disrupt their ability to save for retirement.
And the Voya survey results refer to yet a third way inflation can negatively impact retirement savings: when higher prices compel savers to dip into retirement accounts to help meet expenses. Forty-three percent of respondents said they’ve had to access funds earmarked for retirement savings because of inflation.
It seems inflation can potentially complicate the journey toward a secure retirement in multiple ways. And retirement savers of all ages are susceptible. Voya Financial’s research found that 73% of millenials and 74% of Generation X are concerned about how inflation could affect their retirement savings.
That said, it’s difficult to dispute the unique vulnerability retirees and retirement-age savers have to the effects of persistently high prices. So let’s talk a little more about that.
More recent research than Global Financial’s in August 2021 seems to further underscore the concerns of older Americans about their ability to remain financially viable during retirement.
Global asset management firm Schroders’ U.S. Retirement Survey 2022 indicated that just 22% of Americans age 60 to 67 think they have enough saved for retirement. The biggest concern of survey respondents? You guessed it – inflation. Sixty-five percent said they are concerned about inflation’s impact on the value of their assets. And 44% of those already retired said their expenses are higher than they anticipated.
Commenting on the acute challenges facing retirees right now, Dylan Huang, head of retirement and wealth management solutions at New York Life, says, “For those currently retired, inflation risk is very real and will impact both how much retirees can withdraw from their portfolio and their lifestyle in retirement.”
The current body of research suggests retirement savers across the generational spectrum have profound concerns about inflation’s overall effect on their retirement nest eggs. And so it would seem that just about everyone could benefit from creating and implementing a comprehensive, thoughtful plan to help lessen inflation’s effects. But it also makes sense that the urgency for this might be greatest among seniors – especially considering we have no way of knowing when we’ll see substantial and lasting relief from high inflation.
As for the components of any such plan, I said last week there are no clever answers to the inflation problem. And there really aren’t. We can spend less and/or earn more. As for earning more, we’re learning that a significant number of retirees could return to work this year. According to ResumeBuilder.com, 20% of retirees are “likely to go back to work this year.” And the research says they’re not planning to do so because they’re bored. They’re planning to do it because of inflation.
Finding ways to help optimize savings could be another important part of an inflation-fighting strategy.
In April, David Schassler, head of quantitative investment solutions at global investment manager VanEck, noted the firm’s position as “vocal advocates for gold as a significant component of an ‘anti-inflation’ allocation.” And in May, Schassler noted the firm’s specialized “inflation allocation” fund was increasing its exposure to the yellow metal due in part to its “behaving as a store of value asset and a strong portfolio diversifier.”
Whether gold is an appropriate asset for your long-term savings regime is a decision only you can make. And I don’t think any one approach, tactic or asset is the cure-all for inflation fallout. But I believe this much is true: Savers – especially those at or near retirement age – would be well-served to look for every advantage as they continue to fight back against the most formidable inflation climate in the last 40 years.
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