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How to Plan for Inflation in Retirement 

Inflation can be a concern for retirees living on a fixed income, who face the prospect of losing buying power over the course of their retirement. 

Inflation, or the increase in the cost of goods and services, is something that affects us all. When inflation is high, it’s easy to see the effects of rising prices at the grocery store, at the gas pump, and elsewhere. Inflation can be especially troubling for retirees, who face the prospect of losing buying power over the course of their retirement. 

Over the past 30 years, inflation has been about 2.3 percent per year, on average. That amounts to costs approximately doubling during that time — an item that cost $1 in 1992 would cost about $2 in 2022.  

Health care costs, which can be some of the biggest expenses for retirees, have generally been rising even faster than other consumer prices. According to an analysis by the Peterson Center on Healthcare and the Kaiser Family Foundation, medical costs have increased 109.2 percent since 2000, while prices for all goods and services have risen 68.8 percent. 

The average person can expect to be retired for 20 to 30 years, so it’s important to plan for how rising costs might affect your finances over the course of those decades.  

PERA’s Defined Benefit Plan (which provides monthly lifetime income) includes annual benefit increases for retirees, but the amount of the increase is set in statute and is not tied directly to inflation. Other types of retirement accounts — such as defined contribution plans like 401(k)s — typically don’t offer any kind of annual increase. It’s up to each retiree to save enough and then spend wisely enough to avoid running out of money in retirement. 

It’s never too early to start planning. The earlier you start, the more confident you’ll be heading into your golden years. Here are some tips for getting started. 

Save more and eliminate debt 

Having extra money on hand can help protect against the effects of inflation. If you plan to use a defined contribution or 401(k) plan to fund the bulk of your retirement, consider contributing more, if you can, or open another account, such as an individual retirement account (IRA). The sooner you start saving, the more time your investments will have to grow. If you have a defined benefit plan, it will provide lifetime income but you may need to also contribute to a 401(k) or IRA to help protect against inflation during your retirement. 

PERA offers voluntary PERAPlus 401(k) and 457 plans to its members who want to save more for retirement. The plans offer a number of fund options, such as target date funds (designed to gradually become less risky over time), a capital preservation fund and a fixed income fund. 

If you’re over the age of 50, a 401(k) or 457 plan can be especially helpful because the IRS allows you to contribute more money to those accounts than younger workers. In 2022, the catch-up contribution limit was $6,500 in addition to the regular limit of $20,500. 

Reducing debt can also be a valuable tool in the fight against inflation. Debt, such as a mortgage or credit card balances, is more than just an added expense in retirement — if the interest rates on those accounts are variable and not fixed, your monthly payments can increase if the Federal Reserve raises interest rates to fight inflation, as we’ve seen several times in 2022. 

Consider delaying retirement if inflation is high 

We all want to retire as soon as possible, but it’s worth considering waiting a little longer if inflation is high. Periods of high inflation are usually temporary, so if you put off retirement for another year or two, you may find yourself entering retirement in better economic conditions. 

Delaying retirement can also have some added benefits: You have more time to save and plan, and if you have a defined benefit plan or expect to receive a Social Security benefit, retiring later will entitle you to a larger monthly benefit. 

Another option, if you can’t delay retirement, is to consider working part-time during retirement. Picking up a part-time job will give you some extra cash in hand to protect against the effects of rising prices. 

As a Colorado PERA member, there are some limits on working after retirement if you work for a PERA-affiliated employer. 

Consult a qualified financial adviser 

Wherever you are in your retirement planning, working with a professional can make the process much easier, especially when trying to plan for inflation. A qualified financial adviser can take a look at your accounts, see if you’re on track to meet your financial goals, and suggest changes to improve your position. These experts often have knowledge of and experience with various savings options and investments that might be particularly well-suited for fighting inflation. 

PERA is the best source for information related to your PERA account. Members can visit, browse the video library, sign up for live webinars or watch webinars on demand anytime. Individuals within a few years of retirement can schedule an appointment with a benefits counselor to discuss their transition to retirement by logging into your secure account or calling Customer Service at 800-759-7372.  Members may also contact us to get more information on their benefits. 

Related: Don't Hire a Financial Professional Before Considering These Points