Tackle the Risks that Inflation Can Pose to a Long and Successful Retirement

Don’t let the rising cost of living and cognitive decline derail your best laid plans. Bring these risks up with your financial professional and plan for them now.

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(Image credit: Getty Images)

Many Americans dream of a long, well-deserved retirement. And with increasing lifespans, the prospect of spending 20-30 years in retirement is within the realm of possibility for many people. While spending more time in your golden years sounds ideal, it also requires careful planning when it comes to finances. After all, you want your money to last as long as you do, right?

But one important — yet often overlooked — component is how inflation will impact your carefully saved retirement funds. Remember how much you used to pay for groceries 10 or 20 years ago? It was relatively cheap compared to now. As more time goes on, everyday things like groceries or gas only get more expensive. Even a 3% inflation rate can mean the cost of living can double within 24 years. That’s the length of some people’s retirement! It’s no wonder then that over half (57%) of Americans are worried inflation will make basic retirement expenses unaffordable, according to the Retirement Risk Readiness Study from Allianz Life*.

This issue is particularly jarring when it comes to health care expenses, which are growing at a far faster rate than other costs. According to that same Allianz life study, more than half (52%) of retirees said they view rising health care costs as one of the greatest risks to their retirement security. What’s more, those costs are expected to rise an average of 5.5% every year over the next decade.

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While we know Americans are worried about rising costs in retirement, it seems they aren’t taking much action to address those concerns, since fewer than a quarter of people (24%) say they are discussing the impact of inflation with their financial professional. That’s a distressing figure, especially because so much of these concerns can be addressed with proper risk mitigation and a sound retirement strategy.

Make a plan now

If you’re thinking you will be able to wing it and navigate rising costs on your own, think again. Annual increases in Social Security aren’t typically enough to keep up with inflation on their own. For example, the 2021 cost-of-living adjustment (COLA) is a mere 1.3%, which adds up to less than the cost of a tank of gas each month.

It’s generally a good idea to build out a retirement strategy early that accounts for this rising cost of living and that can address increasing expenses in retirement. Even nominal inflation can wreak havoc on retirement when compounded. Working with a financial professional, you can create a solution that makes sense for you and your goals, and can also address rising health care costs, which for most take up a big chunk of our expenses as we age. This could mean adjusting your strategy for taking Social Security payments or exploring options for increasing income potential in retirement, like those that some annuities can offer through either built-in or additional cost riders.

Creating a strategy now not only can help mitigate some of the risks posed by inflation, but it can also alleviate stress down the road.

Figuring in the impact of cognitive decline

Managing inflation costs can be complex for anyone. But as we age, it may become an even more difficult task. The reality is that as we age, for many of us, our cognitive capabilities will likely decline as we enter the latter part of retirement (or even before in some cases). This means navigating complicated financial and retirement matters can become much harder as we get older. In fact, some studies confirm that declining cognition is directly connected to a “significant” decline in financial literacy.

While it’s no fun facing aging and our potential cognitive decline head on, it’s important to take a realistic approach here. This is just one other reason that making a plan now can help in the long run. And relying on the support of a financial professional who understands your financial situation can help immensely. Working with an attorney to ensure you have a power of attorney as well as other estate planning documents in place is another important step in the planning process.

This may sound overwhelming, but again this is a risk to retirement that can be mitigated early on with proper planning. Being prepared to address inflation as well as understanding the impacts of aging will help put you in a much better position to live out your life comfortably and on your terms.

Annuities can help you meet your long-term retirement goals by offering tax-deferred growth potential, a death benefit during the accumulation phase, and a guaranteed stream of income at retirement.

*Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.


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.