How to Factor Inflation Into Your Retirement Planning

Inflation has certainly been the primary buzzword for 2022, and its impact is squeezing not only our current budgets but also our financial plans for the future. According to Northwestern Mutual’s 2022 Planning & Progress Study, Americans now believe they will need $1.25 million for a comfortable retirement — a 20 percent increase since 2021.

“It's a period of uncertainty for many people, driven largely by rising inflation and volatility in the markets. We've also seen upticks in spending as people have resumed a sense of normalcy in their lives following the earlier days of the pandemic,” said Christian Mitchell, Executive Vice President and Chief Customer Officer at Northwestern Mutual. “These factors are leading many people to recalibrate their thinking about how much they'll need to retire and how long it will take them to get there."

Amid the increasing cost of living, it’s understandable if you have concerns about your own nest egg. Luckily, the news isn’t all bad. Here’s what to know about the impact of inflation on retirement.

IRS contribution limits are increasing

Beginning in 2023, you’ll be able to put more money into tax-advantaged retirement accounts, which could help you boost your retirement savings. 401(k) and traditional IRA contributions can also reduce your taxable income during your working years.

Along with larger retirement contribution limits, the IRS is increasing the standard deduction and tax brackets, which could help you save on taxes and allow you to put away more for retirement.

Social Security payments are also set to increase

In October, the Social Security Administration announced the largest increase in more than 40 years for its annual Cost-of-Living Adjustment (COLA). Benefits checks will go up 8.7 percent for 2023 — about $135 per month for most recipients.

This is certainly good news for those who are receiving Social Security (or will be in the coming years) as benefits are guaranteed and unaffected by swings in the market. That’s why many people count on Social Security for a base of reliable income in retirement.

Rising costs are a key reason to build a strong retirement plan

A retirement plan is a blueprint for how you’ll generate reliable income when you’re no longer working. The plan will help show you how you’ll eventually turn your savings into income in retirement.

"It's one of those questions on so many people's minds: How long should I expect to work in order to save enough for retirement?" said Mitchell. "It's really difficult to answer because there are all kinds of considerations to factor in."

There are a number of retirement risks that a plan can help you mitigate — inflation is just one of them.

Generating income in retirement

Financial professionals understand these risks and can help you create a personalized roadmap for living the life you want in retirement. They can also help you set a savings target based on how you envision spending your golden years. By using a range of financial options that reinforce each other, they can prepare you for the potential risks to your retirement income. Those options may include:

A retirement plan can show you how these financial options can work together to create reliable income for you. By using these options together along with additional strategies, you can minimize some of the most common risks to your retirement savings — including inflation.

No matter what the economic environment is like when you retire, having a comprehensive plan in place is the best way to ensure your peace of mind.

All investments carry some level of risk including the potential loss of all money invested.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.