What Rising Prices Could Mean for Your Retirement Plans

If you’re planning to retire in the next year or two, you need to understand what you spend on expenses now that prices are higher, because that’s how much your savings will have to cover.

About 1 in 8 Gen Xers and baby boomers say they’ve postponed or considered postponing retirement due to inflation, according to a March 2022 survey by the Nationwide Retirement Institute. With an inflation rate over 8% and hitting a 40-year high, coupled with a stock market that’s seen a double-digit percentage drop since the start of the year, people’s concerns aren’t misplaced.

If your stop-work date is on the horizon, here’s what you should understand about how inflation affects your retirement.

Why inflation matters

Inflation represents how much the cost of goods and services has gone up over a period, usually one year. If inflation on a particular item is 8%, that typically means that it now costs you 8% more than it did a year ago.

“In the simplest terms, if a retiree hypothetically spends $50,000 per year on variable expenses, and that $50,000 inflates by 8.5%, what used to cost $50,000 now costs $54,250,” Rylance says.

When to run the numbers

If you’re planning to retire in the next year or two, you need to understand what you spend on expenses now that prices are higher because that’s how much your savings will have to cover.

“We have to look at our day-to-day living expenses as well as our big expenditures and other plans that might be on the horizon,” says Nicole Wirick, a CFP in Birmingham, Michigan. “From there, we then look to what income sources we have available to fund those needs.”

“Everybody who is ready to retire has to do a pretty gnarly budgeting process,” Rylance says. “Every single time people do it, they go, ‘Wow, I had no idea I spent that much on that particular thing.”

How to adjust your plan

If your retirement income and your budget after inflation aren’t meshing, you may need to rethink the timing of your workforce exit or the way you spend your cash.

Reconsider spending habits

Rethinking major purchases can help if higher prices make your retirement budget feel claustrophobic. If you have a big trip planned, consider waiting a year. Thinking of buying a used car and prices are up 30%? Put that off. Were you planning to move? You may want to wait until home prices cool a bit.

The article What Rising Prices Could Mean for Your Retirement Plans originally appeared on NerdWallet.