How to plan for retirement when inflation peaks in 40 years

Inflation in the United States hit a 40-year high in March as consumer prices rose as much as 8.5 per cent. from a year ago. While inflation is usually associated with higher costs for groceries, gas, and other living expenses, many Americans may also wonder: Can inflation also break my nest egg?

For Americans approaching retirement, a common concern is the potential impact of stock market volatility on their investments.

“What we do know is that if you experience a significant loss within 10 years before retirement, it can really delay or affect your retirement plans for the rest of your life. It can have that big impact,” Walser Wealth Management President Rebecca Walser told CBS News. “So it’s very important for people who’s so close to retirement, to really be careful in this time where the market is coming back, where we’re seeing inflation, we’re seeing a lot of geopolitical turmoil.”

As these factors could dampen market returns, Walser said people on the legendary retirement slide could consider moving some of their money into Treasury Inflation-Protected Security (TIPS), U.S. government bonds that could “help mitigate the inflationary impact of the at least for the short term. ”

Traditionally, financial advisers have recommended that people assume an annual inflation rate of around 3% when planning to retire. But as the United States now faces the highest inflation in decades, Walser said people should plan higher interest rates.

Employer influence

For employers, it can be difficult to adjust their annual compensation and benefits to take account of rising inflation.

“If you look at what happened between 2021 and 2022, many employers stuck to the traditional average annual increase of 3% because at the time, they could say, well, maybe it’s temporary. It’s not really affecting the long term. And Of course, employers do not want to be locked into an inflation-adjusted wage if the numbers then fall again, “Walser said.

As a result, several companies are implementing retention bonuses as a financial incentive for valued employees to stay on board.

“After the big layoff in 2021, we had so many people leaving the workforce that we already saw higher wage increases year by year, but also employers implemented a retention bonus to get people to stay. And that’s a way they could “Take into account inflation, but do not lock that price increase forever on that wage,” Walser said.

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