How to keep inflation from derailing your retirement
One way to think about retirement is as an equation. Kind of like A + B = C. Except it’s more like A + B + C + D + E + F + G + H = I. “I” is your ideal retirement. Your ideal life. That’s the goal. The stuff to the left of the equals sign is what makes “I” possible. Those are the variables. They call them variables because they…wait for it…vary.
The variables are things like when you retire, how long you live, how much you spend in retirement, how much you’ve saved, how well markets perform, when you claim Social Security and how much you spend on healthcare.
Another important variable is inflation. It can have a huge impact on your plans. If inflation is low, all else being equal, retiring (and staying retired) is easier. If inflation is high, it’s tougher. As I’m sure you’ve noticed, inflation is pretty high right now. Like “Willie Nelson on his tour bus” high (figuratively speaking). Inflation is the highest it has been in 40 years so your income in retirement will buy less than it used to.
So how do you keep inflation from derailing your retirement? You solve for “I.” You remember “I.” That’s your ideal retirement in the equation above. Unfortunately, if a key variable like inflation changes, the equation no longer adds up to “I”. Different inputs will equal a different output. So you need to adjust one or more of the other variables to compensate. If inflation doesn’t stay elevated for long, then changes might not be necessary. But if inflation persists, you may need to adjust somewhere else. For example, you could save more. Or retire later. Or pay off debt, cut retirement expenses, delay Social Security, change your asset allocation, protect against sequence risk, reduce your withdrawal rate or work part-time in retirement.
You have lots of options to keep your plans on track. And that’s my point. This article isn’t a deep dive into the “How To” of financial planning. It’s just a reminder that when one variable changes, it’s not the end of the world. In fact, all the variables will be changing all the time. That’s why retirement planning isn’t a “set it and forget it” proposition. You need to make constant adjustments. Right now that means adjusting for inflation. A year from now it will be something else. Ditto for 5, 10 or 15 years from now.
The world is constantly changing. That means elements of your retirement plan will need to change as well. If you can make those changes yourself, great. If you need to hire someone to help you, that’s fine too. The important thing is to have a detailed plan that evolves as needed to get you to where you want to go. Do that and you’ll have a secure, meaningful retirement doing the things you want with the people you love.
One quick thing before I go. When we plan for inflation, we’re planning for a long life. We’re trying to protect ourselves against the risk that we’ll live a really long time and things will get much more expensive. And planning for a long life is important, but it’s also important to plan for a good life. After all, what’s the point of having those extra years if you’re not enjoying yourself. I just posted a new video to the Intentional Retirement YouTube channel that discusses how to add life to your years rather than just years to your life. To watch, just click the link below. And if you haven’t already, be sure to click “Subscribe” when you visit our channel. That way you’ll be sure to see the latest content when it’s available. Thanks!
YouTube Video: A Good Life vs. A Long Life
Be Intentional,
Joe