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The inflation rate impacts how much the retirement savings of a person would really be worth down the line. Kavan Choksi mentions that inflation can severely devalue one’s savings and reduce their income over time. Hence, factoring inflation into retirement planning is important for creating a workable, practical financial strategy for the future.

Kavan Choksi sheds light on how retirees can deal with the impact of inflation

The prices of everyday essentials like groceries, gas, and utilities go up during a period of inflation, and hence take a bigger bite out of the retirement savings of a person. As inflation can increase the general cost of living and lower the value of one’s hard-earned dollars over time, it is a vital consideration in retirement planning.

Prior to understanding the potential impact of inflation on retirement funds, one needs to think about how much money they may need to save for retirement in the first place. A general rule of thumb is that one would require about 80% to 100% of their pre-retirement income for every year they have retired. One must also understand that their spending and income are likely to change as they retire. Lifestyle inflation along with traditional inflation can impact one’s budget.

Here are a few ways retirees can minimize the impact of inflation on their retirement savings:

  • Reduce housing costs: Moving to a smaller home after retirement can help lower the monthly outflow for property taxes, maintenance, homeowners insurance, as well as utilities. Retirees who are worried about future inflation should avoid renting.
  • Add inflation-correlated investments to the portfolio. There are specific investments that tend to do better when inflation is high. Hence, one should consider rebalancing their portfolio to include inflation-proof stocks or higher-interest bonds.
  • Calculate the retirement needs as early as possible: Starting to save early in the working career while factoring inflation into the savings can help people to be better prepared for fluctuations in the economy.

Retirement accounts, like a 401(k) and an IRA, are among the most common places people put their money in for their retirement. However, due to their annual contribution limits, these accounts can be just a part of the retirement investment strategy. Subsequent to reaching the maximum annual contribution limits for 401(k) plans and/or IRAs, one should consider additional investment options. As people get closer to their retirement, they should start putting less money in stocks, and more funds in investments whose value is likely to go up as inflation rises, such as Treasury Inflation Protected Securities (TIPS) and I Bonds.

As per Kavan Choksi, passive forms of income, like rental income, dividends and interest generally move in the same direction as inflation, even though they might not equal it. A large percentage of retirees tend to collect at least one of these three income sources. Rental income can especially prove to be a strong income source during higher periods of inflation. In case leases are locked into terms no greater than one year, landlords may raise rent to account for inflation at the end of the lease term.

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