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Will the Inflation Rate of 2022 Deflate Your Retirement Savings?


In 2022, inflation impacts all aspects of American life. At record-breaking highs, seniors across the country are worried inflation threatens their retirement savings and income.

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Below, we help you understand how inflation can impact your retirement in the coming years and how to combat its adverse effects.

What is Inflation, and How Does it Work?

The inflation rate measures the price increase of goods and services year-over-year. Inflation occurs when prices rise due to external factors impacting the economy. When demand increases, so will inflation, as consumers are more apt to pay higher costs for goods and services.

Several factors can impact inflation. The current inflation hike is fueled mainly by supply chain issues, high consumer demand from the COVID-19 pandemic, stimulus payments, and global tensions.

Rising inflation decreases the power of your money. For example, if you had $5 in 1950, you may use it to buy ten gallons of gasoline. However, in 2022, that same $5 may only allow you to buy one gallon of gas. Thus, the power of your money decreases over time due to inflation.

However, not all inflation is bad. Many economists state that a sustainable rate of inflation is suitable for maintaining a healthy economy.

When you think about retirement, an inflation increase can encourage you to invest your money earlier to grow your retirement portfolio at a higher rate in the future. Therefore, investing early can produce a more significant return on your initial investment.

What is the Inflation Rate for 2022?

In 2022, the inflation rate in the United States is sitting at a forty-year high of 9.1%. However, inflation’s impact on you may vary based on where you purchase your goods and services.

2022 Inflation Rate for Everyday Goods and Services

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The current inflation rate is an average of the total inflation across the country provided by the consumer price index. The Bureau of Labor Statistics monitors the consumer price index in eight groups:

  • Food
  • Housing
  • Apparel
  • Recreation
  • Medical care
  • Communication
  • Transportation
  • Other goods and services

The average price increase of these eight groups creates the inflation rate in the U.S.

How the Inflation Rate Impacts Retirement

On average, people are living longer now than ever. This means it is imperative to plan for retirement so you can stretch your dollars as long as possible.

With costs continuing to rise, this can become a challenge for many. Inflation impacts the price of everything, from groceries to rent. Thus, when inflation goes up, so does the cost of living.

Retirees often feel they are most negatively impacted by high inflation. Being on a fixed income usually means you do not see a raise in pay when prices begin to inflate. So, you must choose which items are necessary and which may need to wait until your next check.

In 2022, a retiree’s average annual fixed income is $37,335 or roughly $3,100 monthly before taxes. Rising inflation may force seniors to stay at their jobs longer or return to work part-time after retirement to make ends meet. If you do not prepare for high inflation, it impacts the quality of your life after retirement and your ability to retire.

What are the Main Sources of Retirement Income for Seniors?

It is not uncommon for a retired senior to live on a fixed income. For many, Social Security benefits are the only income stream available after retirement. Additional sources of payment include:

  • Pensions
  • Retirement plans
  • Rental property income
  • Part-time employment

Social Security is a federal retirement program for seniors in the U.S. who pay taxes while working for at least ten years. Your Social Security income is based on your average income for the last 35 years you worked.

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If you work under 35 years, those years are counted as zero income. In 2022, the average monthly Social Security income is $1,666.49.

Pensions are employer-sponsored plans that allow you to continue benefits and pay based on the duration of your employment. While pension plans have decreased in popularity over the years, they are still vital for many seniors to receive retirement income.

Retirement plans also provide a source of income for retired seniors. Individual Retirement Accounts (IRAs) have been available since 1974.

Income from your IRA is based on how much you contributed during your working years. The average IRA annual payment in 2022 is $71,446.

Rental property income has become increasingly popular in the last ten years for retired seniors. Often, seniors will invest in a rental property to get them through retirement and then leave the property to a family member to continue the low-effort income stream for generations to come.

Although retirees are supposed to hang up their hats and enjoy their golden years, many return to work as part-time employees to continue bringing in additional income to support their families. It is not uncommon for a retiree to work a few hours each week at a local convenience store or library to help make ends meet.

However, a high inflation rate can have a negative impact on any of these efforts.

Do Social Security Benefits Increase According to Inflation?

In 1973, the Social Security Administration enacted the cost-of-living adjustment (COLA). The goal of COLA is to help keep Social Security benefits in line with inflation. In 2022, Social Security saw the most significant COLA increase at 5.9% from 2021.

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The cost-of-living adjustment is calculated based on the increase in the consumer price index. Therefore, during the adjustment period, seniors saw an increase based on inflation at the time. In 2023, retirees are estimated to see an even higher COLA increase than in 2022.

In addition to COLA, inflation can impact social security by:

  • Raising the maximum benefit
  • Increasing the maximum taxable earnings limit

The maximum Social Security benefit is $4,149 monthly for those who retire at 70 and above. This income limit is directly tied to inflation, so the maximum Social Security benefit amount will also rise.

Additionally, the maximum taxable income for Social Security will rise, meaning higher earners may see higher Social Security taxes. Currently, this amount is set at $147,000. If this raises, so will the taxes required by higher earners.

How to Protect Your 401(k) From Inflation

Investing in a 401(k) is one of the most common ways to save for retirement in the U.S. today. Understanding how inflation impacts your 401k account is essential to protecting your investments during an unprecedented high-inflation period.

When inflation is high, the purchasing power of your 401(k) dollars decreases. It is, therefore, essential to ensure your 401(k) can sustain high inflation.

As inflation increases, stocks do not automatically adjust; this takes time. So, if high inflation extends over a long period, your 401(k) investments can suffer.

You will see a positive outcome if your 401(k) return is higher than the inflation rate. However, if your 401k return is lower than the inflation rate, you will see negative growth in your 401(k) account.

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To protect your 401(k) investments, you must regularly contribute to your account. Reducing contributions as inflation rises may be tempting, but that will only harm your finances.

Maintaining contributions means your money will continue to grow at a steady pace. It is wise to contribute the maximum amount your employer will match if your 401(k) plan includes an employer match source and you can afford to do so.

A few helpful ways to protect your 401(k) include:

  • Maximizing contributions
  • Diversifying investments
  • Minimizing investment fees

Remember, in 2022, you can contribute up to $20,500 to your 401k account. It is important to contribute at least enough to receive an employer match from your company.

How to Avoid Overspending for Healthcare During High Inflation

One of the best ways to combat inflation is to reduce spending. Lowering the cost of your healthcare is vital, especially as you age. Several excellent options are available to supplement your Medicare coverage.

These plans help cut out-of-pocket costs and combat high inflation with reduced healthcare spending. However, the first step to keeping your Medicare costs low is signing up as soon as you become eligible. This way, you will avoid late-enrollment penalties.

Medicare Part A and Part B are not mandatory. Still, if you do not enroll or have creditable coverage – meaning as good as Medicare – when you first become eligible, you may need to pay a late enrollment penalty if you sign up in the future.

When you first become eligible for Original Medicare, you will receive an Initial Enrollment Period. You can enroll in Medicare Part A, Part B, and a Part D prescription drug plan. Coinciding with this is your Medicare Supplement Open Enrollment Period.

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Enrolling in a Medicare Supplement (Medigap) plan is the most effective way to save money on your healthcare costs in retirement. Medigap plans help reduce out-of-pocket spending by covering the costs Medicare Part A and Part B leave behind, as they only cover 80% on their own.

The Inflation Reduction Act will also lower Medicare Part D drug costs by capping your out-of-pocket spending at $2,000 by 2025.

The combination of Medicare Supplement and Medicare Part D plans helps to round out your healthcare coverage to ensure you never overspend for the care you need.

Should You Retire During High Inflation?

Before retiring, you should understand how inflation may impact your savings. Whether you should retire during high inflation depends on how well you prepare for the risk of high inflation during your retirement.

Some people may have enough income streams to comfortably retire during high inflation. Others may need to create a plan of action for living comfortably on their retirement funds during high inflation.

Not all retirement plans are inflation-proof. However, if you invest your money wisely and create a plan early, retirement during high inflation is doable.

How to Protect Your Retirement in Inflation

The easiest way to protect your retirement during inflation is to cut costs and be prepared early. Ensuring your healthcare coverage helps you save is one of the easiest ways to reduce spending and increase savings during high inflation.

Enrolling in a Medicare Supplement plan is one of the best ways to do this. Medigap plans let you receive healthcare for a fraction of what you pay when you have Original Medicare only.

To understand how much you can save each month, it is important to speak with a licensed Medicare agent who can direct you to the best Medicare Supplement plan for your budget and healthcare needs.

At MedicareFAQ, we provide a free side-by-side plan comparison that allows you to decide which coverage works best for you. We work with the top carriers and never pressure you to choose one plan over another. Let us be your guide!

Complete our online rate form or call the number above to begin your free plan comparison and evaluation today.

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Sources:

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  1. 7 Ways to Handle Retirement With Rising Inflation, US News. Accessed August 2022.
    https://money.usnews.com/money/retirement/aging/articles/how-retirees-can-cope-with-inflation
  2. Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020, KFF. Accessed August 2022.
    https://www.kff.org/medicare/issue-brief/prices-increased-faster-than-inflation-for-half-of-all-drugs-covered-by-medicare-in-2020/
  3. High Inflation Disrupts Retirement Savings Strategies, SHRM. Accessed August 2022.
    https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/high-inflation-disrupts-retirement-savings-strategies.aspx
  4. Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years, BLS. Accessed August 2022.
    https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm
  5. How Inflation Erodes The Value Of Your Money, Forbes. Accessed August 2022.
    https://www.forbes.com/advisor/investing/what-is-inflation/

Jagger Esch

Jagger Esch is the Medicare expert for MedicareFAQ and the founder, president, and CEO of Elite Insurance Partners and MedicareFAQ.com. Since the inception of his first company in 2012, he has been dedicated to helping those eligible for Medicare by providing them with resources to educate themselves on all their Medicare options. He is featured in many publications as well as writes regularly for other expert columns regarding Medicare.

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