Will Higher Inflation Harm Retirees?
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Those nearing or in retirement are worried about what higher-than-expected inflation will mean. Here are a few things to consider to temper their anxiety.
Inflation doesn’t affect everyone in the same way
Inflation does its worst damage when household income is derived in large part from sources that are not adjusted for it. For example, if one has a pension or annuity that does not enjoy periodic cost-of-living adjustments, long-term high inflation will eat into purchasing power significantly. A $1,000/month pension that is not adjusted for inflation would buy just $539-worth of goods in 10 years if inflation averaged 6% throughout that decade.
However, Social Security, an income source that is adjusted annually for inflation, is foundational for today’s retirees. Benefits went up 5.9% in 2022, roughly in line with recent inflation trends. If Social Security provides a large part of a retiree’s income, these adjustments can go a long way toward counteracting the effects of inflation.
Furthermore, research shows that retirees tend to reduce their spending as they age. Though these spending patterns vary, a 1-2% reduction in annual inflation-adjusted spending is common. This natural slow-down in spending provides retirees with a useful cushion to rising prices.
Inflation may not affect as many retirees and as much as one might think. Individual situations will vary, of course, so staying alert is key if inflation remains elevated for many years.