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How to Protect Retirement Savings From Inflation

Overhead view of a couple looking at financial paperwork, using a calculator, in front of a computer.

With U.S. inflation hitting the highest levels in four decades this year[1], many people are worrying about what that means for their savings and investments, including retirement portfolios.

And inflation is not just in the U.S. The pandemic and Russia-Ukraine war have created supply chain delays and other disruptions that exacerbated inflation elsewhere. The euro area, for example, has experienced inflation levels similar to those in the U.S.[2]

High global inflation decreases purchasing power, which means you need more money to maintain your current lifestyle.

For example, $100 might have been enough to enjoy a good meal and a bottle of wine at a nice restaurant 20 years ago, but now that same dinner could cost you $200.

Likewise, $1 million might have been enough to retire on in the past. A decade or so ago, many financial professionals set that amount as the goal for the average retiree. However, your sights might be set well beyond the average, and as inflation decreases how far your savings will go, you might need a portfolio worth more to live the retirement lifestyle you’ve always imagined.

But you don’t need to panic. With careful retirement planning, you can factor in the effects of inflation and potentially still end up with plenty of money for the life you’ve worked hard to enjoy.

Re-examine your retirement plan

Generally, you don’t want to try to time the market, such as by changing your investments based on recent inflation data. But the current environment could be a good reminder to make sure your retirement plan aligns with your goals and risk tolerance, especially if your financial circumstances have changed.

Ideally, your retirement plan already accounts for inflation. By investing rather than just saving, your money can potentially outpace inflation over the long run.

Prior to the recent spike in inflation, however, investors enjoyed approximately three decades of relatively low inflation.[3] So, you might have constructed your retirement plan without much emphasis on inflation.

For example, you might have structured your retirement portfolio entirely with equities toward the start of your career and never adjusted it, but maybe going forward you’d be more comfortable holding a range of asset classes.

As explored in the Santander 2023 Annual Global Market Outlook, inflation seems to affect equities in the short run, in the sense that valuations are inversely proportional to inflation rates.[4] So, if you’re not comfortable with seeing much inflation-related volatility in your portfolio, you might prefer to diversify with possible inflation hedges. Please note that diversification does not assure an investor of profit, nor does it protect from profit loss. Make sure you consult your financial advisor.

  • Treasury Inflation-Protected Securities (TIPS)
  • Real assets (e.g., real estate, infrastructure)
  • Commodities (e.g., precious metals, energy)

If you’re closer to retirement, you might be even more sensitive to valuation changes, given the shorter time horizon to recover from losses. Plus, you might be more invested in asset classes like fixed income. Unless you’re hedged with assets like TIPS, you could also see your portfolio decline. That’s because as interest rates rise due to inflation, fixed-rate bond prices tend to fall.[5]

So, investors should consider structuring their portfolios to hold a diverse range of assets that can potentially limit downside while still aligning with their retirement goals.

You don’t necessarily have to significantly de-risk if you’re planning to work for 20-30 more years and can afford to ride out volatility. But if you want to maintain more stability in your portfolio amidst inflation, you might prefer to add these types of hedges.

Project your retirement income

In addition to analyzing the impact of inflation on investments, it’s important to consider how this will affect your future retirement income. For example, you might be saving enough to replace your current monthly income by the time you retire. But your current monthly income might not be sufficient down the road due to inflation.

Even though some costs in retirement might go down—your mortgage might be paid off by then, for example—inflation could affect your ability to afford other costs like healthcare and educational expenses for your children and eventually grandchildren. Plus, you want to have plenty of money for fun in retirement, whether that means traveling the world or hitting the links as much as possible.

So, consider how much retirement income you’re targeting and how that might vary based on different inflation scenarios and expected returns. You can start by searching for simple online retirement income calculators with inflation inputs. Working with a financial advisor who can run more comprehensive financial models could help you gain further insights.

These calculations could help you develop some baseline scenarios. For example, even in a scenario where inflation remains high and your investments don’t perform as well as they had in the past, you can still know ahead of time what that would mean for your expected retirement income. If the number is lower than you’d like, then you could take steps like maxing out your 401(k) contributions or initiating a Roth IRA conversion to try to increase your post-tax income.

Or, you might decide to adjust your risk tolerance based on retirement income scenarios. If you think inflation will remain high long-term, for example, then you might want your portfolio in what might be considered riskier assets (e.g., equities and real estate) rather than a significant fixed-income allocation.

Offset price increases during retirement

Lastly, investors can plan ahead for offsetting price increases during retirement. If you’re projecting that housing prices will keep going up, for example, maybe you’d be more comfortable buying your dream retirement home before you’re fully retired to lock in a lower price.

Another approach could be to think about supplementary insurance options that can help you avoid having high healthcare costs eat up too much of your retirement income. Or, you might look for passive income streams like buying rental properties or local small businesses with good cash flow.

All of these considerations require significant forecasting and strategizing about complex financial issues. To best protect retirement savings from inflation, consider speaking with financial advisors who can help guide you through all the nuances.

To learn more about retirement and how to help protect wealth from inflation, please reach out to our team of relationship bankers at Santander Private Client or financial advisors at Santander Investment Services.

[1} U.S. Bureau of Labor Statistics. “Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years.” 18 July 2022.

[2] Eurostat. “Flash estimate - August 2022. Euro area annual inflation up to 9.1%.” 31 Aug. 2022

[3] Federal Reserve Bank of Minneapolis. “Consumer Price Index, 1913-”. Retrieved 01 Sept. 2022.

[4] Santander Investment Services & Santander Private Client. “Quarterly Market Outlook.” July 2022. p. 12.

[5] U.S. Securities and Exchange Commission. “Investor Bulletin. Interest rate risk — When Interest Rates Go Up, Prices of Fixed-rate Bonds Fall. 1 June 2013. p. 1.

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