Retirement Planning Summer 2022


Inflation’s Impact on Your Retirement Savings

Inflation is at an incredible level not seen since the 1980’s, The Consumer Price Index, which measures a broad range of goods and services, rose 8.6% in May, the fastest advance in more than 40 years. A U.S. Bureau of Labor Statistics (BLS) report shows inflation figures for various decades. In the 1970’s inflation averaged 7.4%, in 1980’s inflation averaged 5.1%, 1990’s averaged 2.6%, in the 2000’s averaged less than 2%, (1.7%) in the 2010s. From the 1970’s through year-end to 2021, inflation averaged about 3%, however, inflation’s impact on the value of your retirement savings compounds over time. Inflation can gradually reduce its worth overtime. For instance, thanks to inflation, from the start of 1980, the purchasing power of a dollar fell more than 70% by the end of 2021. One dollar left under a mattress in 1980 is worth about thirty cents today. In other words, everything became 70% more expensive to buy. Inflation can reduce the purchasing power of your retirement savings thereby possibly jeopardizing fixed income retirees’ retirement plans.

A Couple of Things You Can Do to Manage It

During periods of inflation consider contributing more to your 401-k. Always strive to contribute enough to get full employer match. Invest regularly, especially in quality stocks/investments that are on sale in a Bear market given you are many years away from retirement. Market conditions will change, and confidence will return. Walk, do not run, by dollar cost averaging into quality stock and quality bond investments. Your 401-(k) plan automatically dollar-cost-averages into investments via bi-weekly before-tax payroll contributions. Building your retirement savings to a level beyond what you may need in retirement creates a cushion in savings that can help meet unexpected periods of higher inflation draining your retirement savings. You may also consider contributing to an Individual Retirement Account (IRA) for you and your Spouse. See your tax accountant on tax deductibility of contributions. Contributions would grow tax deferred and help build extra retirement savings. Always max out your 401-k plan before considering an IRA.

Consider budgeting, it sounds boring, but if your retirement savings purchase less thanks to higher prices, then you must reduce your spending. Nix out one of your streaming applications, etc. Get rid of high interest credit card debt. Or anything not necessary that might be adding to expenses. Here are as few rules of thumb to help manage your finances. Spend no more than 50% of your take-home pay on essential expenses. Try to keep your total monthly debt bills below 36% or your monthly after-tax income. Keep retirement withdrawals to 4% of your retirement savings.

Rebalance your portfolio into investments that outperform during inflationary periods. A real hedge against inflation are investments that can grow their dividends during periods of inflation. Dividend growth equities are an inflation hedge because these investments help maintain purchasing power during inflationary periods.

It is natural to avoid the risk of stocks during times of economic distress, but the reality is that over extended periods of time stocks offer among the highest inflation adjusted returns. Furthermore, all investments carry some degree of risk, however, by assuming the inherent risks of stocks and holding on for the long term, stocks have provided long term growth of your investment that has kept your value ahead of inflation thus increasing a retiree’s purchasing power for retirement. For example, $1 invested in 1929 in the S&P 500 Index would have grown on an inflation adjusted basis to $784. Focus on investing in quality dividend appreciation stocks that are growing dividends 3-10% annually.

Contact Aspetuck Financial Management at, if you would like to discuss how to rebalance into dividend appreciation investments in your 401-k account. If there is interest in receiving educational material on why stocks are a long-term inflation hedge and or information on IRAs, then email us for information. Lastly, Aspetuck Financial Management is available to review your 401-k Plan account investment options with you. Contact us if you would like our help.

Source: First Trust, Ibbotson Associates, U.S. Bureau of Labor Statistics. Hypothetical growth of a $1 investment made on 12/31/1925. Data shows total returns through 4/29/2022 (latest data available). Past performance is no guarantee of future results. This information is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future. The asset classes shown here offer different characteristics in terms of income, tax treatment, capital appreciation and risk. U.S. government securities are subject to interest rate risk but generally do not involve the credit risks associated with investments in other types of debt securities. As a result, the yields available from U.S. government securities are generally lower than the yields available from other debt securities. Common stocks are subject to risks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market. Inflation is represented by the Consumer Price Index (CPI-U) which measures the average change in prices over time that consumers pay for a basket of goods and services. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Long-Term Treasury Bonds are U.S. government bonds that have maturities longer than 10 years. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person.