Planning for Retirement: 5 Smart Savings Strategies When Inflation Looms Ahead

June 26, 2021 Updated: July 11, 2021

The Consumer Price Index (CPI) is often used as a standard way to follow inflation. It measures the average change in prices from one year to the next. When the CPI increases, it’s a sign that overall living costs are on the rise. In May, the CPI for all items increased 5 percent before seasonal adjustment, according to the Bureau of Labor Statistics (pdf).

Besides the CPI, “real inflation can be seen at the grocery store, car lots, home prices, and just about everywhere,” says Denny Artache, certified Social Security claiming strategist and financial adviser with Peak Brokerage Services, LLC.

Inflation is also reflected in money over time: A $1 million nest egg today won’t be able to purchase the same amount of goods or services in the future. If inflation rates increase, the value of each dollar will continue to decrease during the years ahead.

The good news is that there are ways to counter inflation when saving for retirement. Follow these guidelines when making selections for you and your household’s golden days.

Savings Strategy No. 1: Know the Numbers

“Take a hard look at how much money you will need to live the lifestyle you want to live,” says Pamela Yellen, a financial investigator and founder of Bank On Yourself. “Many people get so worried, discouraged, or scared they fail to take this first step, but putting it off only exacerbates the problem.”

When calculating a budget in retirement, you can begin by thinking in today’s dollars. Research travel costs and home prices, along with expenses tied to activities you’d like to pursue. Then run those numbers through an inflation scenario to reveal how much you’ll truly need each month and year in retirement. Some online retirement calculators include estimates for inflation; you can also talk to your financial adviser to build an inflation forecast into your retirement budget.

Savings Strategy No. 2: Make the Most of Your Savings

Learning about the ways you can maximize your funds can help you set up a plan that protects against inflation. If you have a 401(k) plan, for instance, check if it offers an employer match. Some companies offer to contribute to the plan based on the amount you put into the fund. Other accounts, like a traditional IRA or Roth IRA, could also be part of your retirement plan.

“Once we have determined which investment vehicle best fits, the next step would be to pick the type of investments to place in these vehicles giving you the opportunity to hedge inflation,” says Chance Burroughs, an investment associate at Manske Wealth Management.

You might look at past periods of inflation, the current rate of inflation, and forecasted rates for the future. These figures can help you gauge what investments will offer higher rates to help you protect your funds over time. When looking at stocks, bonds, real estate, life insurance, and other options, keep the timeline for retirement in mind.

Savings Strategy No. 3: Increase the Amount You Save

If you have an amount automatically taken from your paycheck each month to put into a retirement account that provides a higher yield than the rate of inflation, you’re off to a good start. Then, “increase the amount you save each year by at least 1 to 2 percent,” Yellen says. “You won’t feel the pinch, but you’ll be surprised by how much your savings will grow.”

If you want to add even more to your savings, there may be other ways to free up funds from your current budget. Paying off debt might enable you to have a higher number of dollars to set aside. Selling items you don’t need could bring in proceeds that can be directed into long-term accounts.

Savings Strategy No. 4: Invest In Yourself

One way to combat rising prices is to have funds that are plush enough to pay for regular expenses. If you’re looking for a promotion or see a chance to move into a higher-earning career, it may be worthwhile to allocate some funds to help you reach those goals. You might spend on training courses, executive coaching, books, or other resources to build certain skills that could result in higher paychecks and bonuses.

Savings Strategy No. 5: Stay Calm and Carry On

It’s easy to feel a sense of helplessness when considering that today’s dollars will not carry as far in the coming years. Predictions of high inflation only add to that, and choices made in the midst of panic run the risk of not being the best decisions in the long run.

“The most important and most basic technique is to form a systematic habit,” Artache says. If you decide to look at your long-term finances every week or once a month, for instance, you’ll naturally get in a groove to follow trends like inflation and react accordingly. “Start your plan today, not tomorrow,” Artache says. “Don’t worry about the amounts—worry about the action and commitment.”

Rachel Hartman is a freelance writer with a background in business and finance. Her work has appeared in national and international publications for more than 10 years. She resides in Miami and travels frequently.