Grow Your Retirement Savings to Keep Up With Inflation

Here’s why you need to keep your retirement money growing even when you’re already using it (hint: inflation and longevity). your retirement savings in retirement
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Key Takeaways

  • Understand if your assets are keeping pace with inflation and cost of living increases
  • Consider how even an “average” rate of inflation can cut into your retirement savings
  • Take a look at some saving and investing suggestions that might help you combat inflation

Most of us probably strived for better-than-average grades at school and better-than-average salaries at work. That being the case, it’s kind of surprising that so many investors seem to be comfortable having “average” retirement savings for their age.

Unfortunately, if your savings are just “average,” they probably aren’t going to account for inflation and cost of living increases both before and during retirement. The hard truth is that even after you retire, your assets will need to grow quicker just to keep up with higher prices.

Not being a top performer might be OK for some things, like golf or gardening. Increasingly, however, having an average amount of retirement savings can put you at risk. With people living longer, many of us might spend more years in retirement than in working life. And don’t put any bets on the cost of living going anywhere but up. Starting with above-average retirement savings and keeping that money growing even after you’re done working could put you on far better footing in case you end up enjoying a long stretch of golden years.

Building a better-than-average savings account that works harder on your behalf is especially important for women, partly because they tend to live longer, but also because women often (but not always) end up interrupting their careers to have kids or care for parents or a spouse and may neglect their own savings. No one is saying not to take care of your family. Lots of life events can stop people—both men and women—from steadily building retirement funds. It’s important, however, to get back in the savings game as soon as possible after a life event knocks you off track, and not to break the habit. Successful savers put their future needs first and don’t see saving as a chore or a duty. They see it as a gift to their future self.

Even “Average” Inflation Can Eat Away Retirement Funds

Before considering some tools and techniques that might help blunt the blow of inflation biting your savings, here’s something else to consider: A simple mathematical principle called the Rule of 72 can help estimate how long it may take for prices to double. Just divide 72 by the rate of growth, and you get the number of years before inflation doubles. For example, at 3% inflation, it will take a mere 24 years for costs to double. For instance, the average new car price reached nearly $36,000 this year, according to Kelley Blue Book. That compares with around $19,000 in 1994, as reported by The New York Times.

Investment returns must first keep up with the rate of inflation—no matter how modest—in order to increase real purchasing power. For example, an investment that returns 2% before inflation when the Consumer Price Index (CPI) is rising at a 3% clip will actually produce a negative return (-1%) when adjusted for inflation. 

Let’s look at how Americans are doing as far as their average retirement savings. 

Retirement savings: Are you above average?

Preparation Is Key: Dedicate Time to Your Retirement Savings Plan Today for a Smoother Tomorrow

The natural tendency to avoid this topic doesn’t magically make it go away. It’s important to look at your savings, however hard that might be to contemplate, and figure out a way to build them up and make sure they continue to outpace inflation even after you retire. Think about spending one afternoon now. Then maybe check back in on your savings plan and your progress every six months or on a yearly basis from here on out. Try and develop some retirement goals, which could give you more motivation to save.

Maybe you were an average student and have a high golf handicap. But by using some of the ideas below, you might be able to chip your way out of the sand trap and into a better-than-average savings situation. None of these is a magic bullet, and it takes time to see an impact. Try taking things one at a time so the burden doesn’t seem too large.

  • Pay down high-interest credit card debt. Many folks think they’re doing the best they can with saving, but that isn’t always the case. If you have credit card debt at a high level of interest, you're probably wasting money. So paying high-interest debt off is critical. If there’s no other place you feel like you can cut back, consider making this your top priority. As founding father Ben Franklin said, “A penny saved is a penny earned.” 
  • Get the full workplace match. If you participate in your employer's retirement plan, getting the full match in your 401(k) is another place where you can stop wasting money. At least contribute the minimum to get a full match. Remember to start early to take advantage of compounding.
  • Ask about the retirement policy before taking a job. Some people are bashful about asking prospective employers for information about work retirement plans. Don’t be. This is arguably even more important than the company’s vacation policy or performance review process. Ask about retirement savings accounts and match and profit sharing when interviewing for a new job, and check if they have a pension. Although rare, pensions are still out there, and can help with savings. Even if a pension is just $500 a month—there’s how you can pay some bills. 
  • If you’re self-employed or have a side gig, remember to have a retirement plan for that business. Even if your side gig is selling cupcakes on the weekend, consider keeping 75% of the money for current needs but putting 25% away in a small-business retirement fund to help bump up your savings and get above average. If you don’t have a side gig, consider starting one. It’s a painful truth that many people need more money than they make to build up their savings bundle, but if you have a hobby you love and think there’s a way to make money from it, explore the possibility. 
  • If you leave the workforce, don’t stop saving. Let’s say you have to take a year off work to care for an ailing parent or spouse. It happens quite often. If you do find yourself in this position, make sure you’re contributing to a spousal IRA. You can use your spouse's income to make this IRA contribution, even if you’re not working. This is another way to make sure that both spouses make IRA contributions every year, even if one is out of the workforce.

Other Ways to Pursue Above-Average Savings

There are other ways to build above-average savings. Take continuing education courses in your field when possible so you can add credentials that might get you that higher-paying job. If your company doesn’t have an adequate retirement plan and you have the flexibility, consider taking your skills down the road to a company that does. If you’ve been paying for some or all of your kids’ college bills and now they’ve graduated, see if you can earmark some of that money for your savings plan. Look at all of your hobbies and “fun” spending and see what truly makes you happier and what doesn’t. If there’s a way to save $100 a month by dropping that one class you’re sick of or the club membership you barely use, think of it as an extra $100 in the bank. 

Your investment portfolio is another place you can try to fight inflation. One strategy that seeks to reduce the impact of rising inflation on bond holdings is to build a bond “ladder”—buying bonds that mature in two, four, six, eight, and 10 years, for example. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates. Typically, a bond ladder might fit best for an investor who doesn’t mind holding them for up to 10 years. Inflation-linked bonds seek to offer protection from inflation, but these instruments make up a smaller share of the overall bond market and are somewhat less liquid.

Do things one at a time. If you have to pay off high-interest credit card debt, just focus on that for now. Building better savings is a process, like anything else. There may be months when you can’t do it, but get back at it and don’t give up. Even putting a few dollars away every month or making the minimum 401(k) contribution could help multiply your savings through compounding over time, even as you work to pay off other debt such as that from college or credit cards. An automatic savings plan allows you to “set it and forget it,” so to speak. Put yourself and your future self first, and you might have a chance to rise above that “C average” in retirement savings and keep up with the drip-drip of inflation.

All investing involves risk including the possible loss of principal


Key Takeaways

  • Understand if your assets are keeping pace with inflation and cost of living increases
  • Consider how even an “average” rate of inflation can cut into your retirement savings
  • Take a look at some saving and investing suggestions that might help you combat inflation

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