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Education Center » Inflation - one of retirement's biggest risks - is back

Inflation - one of retirement's biggest risks - is back


Four strategies that could help you counter the effects of inflation as you head into and through retirement.

Inflation is on the rise. The Consumer Price Index (CPI) measured the increase in the average cost of goods and services at 5.4% for the 12-month period ending September 2021.1 That number can be shocking for folks used to a decade of inflation mostly below 2%.2

Many economists expect that this current bout of inflation will be temporary, driven largely by pandemic-related factors. Still, “it is a useful reminder of the importance of factoring inflation’s effects into your retirement planning,” says Surya Kolluri, managing director of thought leadership for Bank of America’s Retirement & Personal Wealth Solutions.

Graph titled �How inflation can deflate buying power.� With dek, �See how even 2-2.5% inflation � the Fed�s target range � could affect the purchasing power of $1 million for retirees between age 60 and 85.� The legend shows that the blue line represents 2% inflation and the red line represents 2.5% inflation. The y-axis shows values from bottom to top: �$500K,� �$600K,� �$700K,� �$800K,� �$900K� and �$1MM.� The x-axis shows �Age 60� on the part of the axis closest to the origin (0,0), while it shows �Age 85� on the far right side of the axis. The red line has a value of �$531,026� and the blue line has a value of �$603,465.� Both lines meet at the coordinates �0, $1MM� where the 0 represents x and �$1MM� represents y, although the red line is steeper than the blue line to represent a greater decrease in buying power. Below the red line is a 100 dollar bill that fills up the empty space below the line on the graph and cuts off around Benjamin Franklin�s eyes. In the space between both lines is also the 100 dollar bill, but with higher opacity to signify the difference between how the two inflation rates affect the purchasing power of $1 million for retirees between 60 and 85.

Source: Calculated using Inflation Calculator, November 2021.

The risk to retirees

For retirees and those nearing retirement, inflation has more serious financial consequences than for other groups: Over time, rising prices can significantly reduce your spending power when you are living on a fixed income. But even a small hike in inflation can have a sizable impact.

Retirees will get a 5.9% cost-of-living adjustment (COLA) to their Social Security benefits in 20223 — the largest increase in 40 years — to help them cope. However, it is unlikely that will offset all rising costs.4 The price of health care, for example, is increasing even faster than the CPI, and you are likely to see a spike in Medicare premiums and deductibles as well.

“We need to be financially prepared to live 100 years,” says Kolluri. “When you consider how long your retirement is likely to last, having a plan to help you deal with inflation’s effects is a must.”


Delay claiming Social Security benefits. Waiting until age 70 to start collecting Social Security could raise your lifetime monthly benefits by 76%.5 This is one way to hedge against the potential for inflation, but it is not a one-size-fits-all strategy. Considerations like your health and expected longevity, the age difference between you and your spouse, how much longer you may want to work, other sources of income and tax issues might all play a role in helping you determine the best approach, Kolluri says.


Invest for potential growth and rebalance regularly. “Given today’s low interest rates, coupled with rising inflation, retirees may want to allocate more of their assets to equities in the near term which may outpace inflation as we wait for higher yields and a steeper yield curve in fixed income markets,” suggests Joe Curtin, head of CIO Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank. “Equities may offer an opportunity for the growth of your assets to exceed the rate of inflation as we wait for higher yields in fixed income markets.” (The yield curve steepens when the difference between short-term and long-term rates increases.)


Consider the role of annuities. These contracts issued by insurance companies can be indispensable in your retirement toolbox, says Kolluri. Investing a portion of your retirement assets in an annuity may provide you with a consistent stream of fixed income for life or a period specified in the contract.


Prepare for future long-term care costs. “If you look at the arc of human history, in spite of diseases, we have steadily increased longevity,” says Kolluri. “We need to be prepared for the costs associated with it.” In retirement, a 65-year-old couple with median drug expenses is likely to need $270,000 to cover their out-of-pocket health care costs.6 And considering that increases in the cost of health care tend to outpace inflation, advance planning is key.

One strategy to help offset rising health care costs is to contribute the most you can to your health savings account (HSA), which can be used in conjunction with a high-deductible medical insurance plan. HSAs let you carry over funds year to year and offer the triple benefit of pretax contributions, tax-free growth and tax-free withdrawals for qualified medical expenses.

Another option to consider is a life insurance policy with a long-term care benefit rider, which, at an extra cost, could potentially cover some health care costs while letting you leave a tax-free sum to your heirs.

Inflation is not something we can control, says Kolluri. “But there are concrete steps we can take to lessen its impact on our retirement security.” Planning can help ensure that you will be able to afford the life you want in retirement, even when inflation boosts your cost of living.

Learn more and take action

  • Review this presentation to find out more on how to maximize your Social Security benefits.
  • Do you know how much money you’ll need when you retire? Use this worksheet to help you figure out your retirement budget.


1 “Consumer Price Index – September 2021,” U.S. Bureau of Labor Statistics, October 13, 2021.

2 “Inflation, consumer prices for the United States,” Federal Reserve Bank of St. Louis, May 26, 2021.

3 “Social Security benefits to jump 5.9% in 2022 in biggest increase in 40 years,” MarketWatch, October 13, 2022.

4 “Social Security recipients get 5.9% increase, but rising prices will offset the boost,” CNN, October 13, 2021.

5 Claiming Social Security, Chief Investment Office, Merrill and Bank of America Private Bank, 2020.

6 Employee Benefits Research Institute, June 2020.

Opinions are as of 11/16/2021 and are subject to change.

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