Managing Inflation Risk in Retirement

Longer retirements mean inflation can put a serious dent in even the best-laid plans. You need an income strategy to help keep up with rising prices.

While there are many potential risks to consider when planning for retirement, one that is often overlooked is inflation. Most people factor in inflation when planning how much they will need when they reach retirement. But inflation does not stop the day you retire. In fact, your budget on the day you retire could look very different five, 10 or 20 years into retirement. Not understanding inflation — and more importantly — not having a plan to address it, can derail even the most well-planned retirement strategies.

Based on life expectancy tables, someone retiring today at age 65 could expect to live another 20 years or so. So even with a modest 3% inflation rate, day-to-day costs of living could double after about 24 years, based on consumer price index and Bureau of Labor Statistics data. And at the current rate, health care costs, which play an increasingly important role as we all age, will likely rise at an even greater pace.

Also consider Social Security payments. For 2020, the Social Security Administration raised benefits by 1.6%. That cost of living adjustment (COLA) would increase the average Social Security benefit by just $24 per month. That certainly doesn’t go very far when you factor in the costs a typical retiree is paying each month for housing, transportation, prescriptions, other medical expenses and more. Most recipients will likely not see an increase due to the increase in Medicare costs.

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The bottom line is that you need a plan to address rising costs across all of your sources of income, and help make sure your retirement income keeps pace, while also ensuring your money will last through a long retirement. Here are a few strategies you can explore today to help you manage inflation in the future.

Estimate how many years you may be retired, and what your potential income should be

It’s important to set realistic expectations for both how long you may be in retirement, and how much income you’ll need. Of course, there are no guarantees, but those of you in good health who have a history of longevity in the family may be looking at a very long retirement (think 30 years!). You’ll need to help ensure you have the funds to cover not only day-to-day things, but also unexpected costs like major medical expenses.

Building out a realistic budget that takes into account essential, discretionary and unexpected costs is a smart first step. With that as a start, you can review the ways high inflation and low interest rates may affect total rates of return, and your income, during retirement. It might be different than you anticipated. A financial adviser can help you chart your year-to-year needs and how they can change as you get further along into retirement.

Think through retirement income strategy

Some people try to address inflation in their retirement income strategy on their own. This might look like withdrawing no more that 4% of an asset, and then increasing the withdrawal by the rate of inflation each year to help address rising costs. But as those withdrawals grow, they could represent a large piece of your retirement account over time. This can seriously erode funds, and you could face either living with less income, or the reality of running out of money.

Proactively, you can also work to save more during your working years, keeping in mind that you will need to give yourself that annual increase in retirement to help address inflation.

Guaranteed sources of income, like annuities, can sometimes be a good solution to help ensure you have money that can last throughout retirement. Some annuities can offer increasing income opportunities through various benefits or income riders, which are benefits that provide monthly payments for life to the policyholder for an additional charge.

There are some fixed index annuities, and even now index variable annuities, that actually offer potential income increases every year to help address the effects of inflation. These annual increases are available by purchasing optional riders that may be available for an additional charge. You could also consider long-term care insurance policies or an insurance policy or annuity that offers riders to help supplement the rising costs of health care.

Managing costs in retirement

As you think through your future expenses and how inflation may impact them, it’s important to manage expectations, be realistic, and to focus on what you can control. Working with a financial professional, you can see what products and solutions can help address longevity, the risk of inflation, and rising health care costs in retirement.

We all want to have a long and comfortable retirement. By creating an income strategy that seeks to address the rising cost of living and health care, you can head into retirement more prepared.

Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Products are issued by Allianz Life Insurance Company of North America.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kelly LaVigne, J.D.
Vice President, Advanced Markets, Allianz Life

Kelly LaVigne is vice president of advanced markets for Allianz Life Insurance Co., where he is responsible for the development of programs that assist financial professionals in serving clients with retirement, estate planning and tax-related strategies.