Should Inflation Kill Your Near-Term Retirement Plans?

(Maurie Backman)

If you’ve been following the news lately – or looking at your credit card bills – then you’re probably aware that the cost of living is skyrocketing. You can thank inflation for that.

In September, the consumer price index rose 8.2% on an annual basis. While that increase has paved the way for an 8.7% cost of living adjustment for social security recipients, it is also an indication that we are nowhere near getting relief from inflation.

If you are on the verge of retirement, you may be wondering if inflation should affect your plans or push you to delay leaving your workforce. The answer? It depends on your financial situation and the higher cost of living your retirement could lead to.

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What sources of income should you expect?

The danger of retiring while inflation is so high is that you may find it difficult to keep up with the cost of living in the absence of your regular salary. Plus, retirement could be a more difficult adjustment if you start at a time when things are so expensive.

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This does not mean inflation has to ruin your retirement plans. And if you have a number of sources of income to aspire to, then you may be able to move forward with exiting your workforce without struggling to manage your expenses.

Let’s say you’re sitting on a decent-sized nest egg. Withdrawals from savings, combined with social security benefits, could make your life costs manageable, even when they are high.

At the same time, it is important to recognize the risks of retiring during rampant inflation. You may need to withdraw from your IRA or 401 (k) plan more withdrawals than you may have originally planned. This could increase the risk of you running out of cash reserves over the course of your life and having difficulties during the later stages of your retirement.

You may also need to be creative in carving out new sources of income in light of inflation. This could mean working part time. But if that’s something you’re willing to do, you could get by pretty well, despite the rising cost of living.

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What changes can you make to your retirement plans?

While the sources of income you have at your disposal might determine whether short-term retirement is a possibility in light of inflation, that’s not the only thing to consider. Also think about what you would like your retirement to be like and whether it is possible or desirable to change your plans.

Perhaps your goal in retiring early is to travel a lot. If you think you can’t afford it, you may decide that it makes more sense to keep working and wait for the cost of living to drop. But if you have simpler retirement plans, some adjustments could make short-term retirement feasible, despite inflation.

Unfortunately, we don’t know when inflation levels will start to drop. And we could find ourselves for many more months with very high living costs. For a near retiree, this could easily pose a challenge. But think about the tools you have (such as additional sources of income) to fight inflation, and also think about the different steps you can take to get around it before deciding if your retirement should be delayed.

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