How to Mitigate Inflation’s Effects on Retirement Savings

According to the U.S. Bureau of Labor Statistics, 2021 and 2022 saw inflation rates of 7% and 6.5%, respectively. As we know, this happened on the heels of the coronavirus pandemic, where shortages and supply-chain snafus—along with massive governmental cash infusions—created a combination of ready cash and fewer goods. Now, even as inflation rates are becoming more steady, the Federal Reserve is carefully trying to balance the need to bring inflation to its target of 2%, without restricting the money supply in a way that will harm job growth.

The U.S. Department of Labor utilizes the Consumer Prices Index (CPI) to measure “inflation as experienced by consumers in their day-to-day living expenses.”  

Although inflation is slowing, likely, you are still feeling the impact every time you get gas or go to the grocery store.

Irrespective of the type of savings vehicle you choose, inflation will still take its toll. This seems to be an inescapable fact. Over the long haul, the average inflation rate has been 3.8% (1960 – 2022). Inflation should always be a consideration for retirement savers because it affects the bottom line, which is how much will be available upon retirement. 


How Much Do You REALLY Need to Retire? 

Let’s say you have $1 million saved and are retiring in 2024. You are not planning on making any additional withdrawals or deposits to your account. Additionally, you are anticipating spending a modest $50k per year and your retirement account has an annual return rate of 5%. Your retirement savings would last 22 years and 9 months using the average inflation rate of 3.8%. 

Without adequate planning, inflation can seriously devalue your retirement income. A retirement plan that incorporates investment growth capable of outpacing inflation rates can substantially mitigate the impact of inflation on daily retirement living.  Use the 3 strategies below to help mitigate inflation’s impact on your retirement savings.


1. Leverage Tax-Smart Tools

As you probably know, one of the main advantages of saving in an IRA versus saving in an account that is not tax-qualified is that all the earnings are tax-deferred.

Invest More Without Earning More

Emma earned $1,000 in her non-qualified savings account this year. If she’s in a 20% marginal federal tax bracket, she’ll pay $200 in additional tax (in addition to any applicable state tax). If Emma earns $1,000 in a Traditional IRA, this amount is not included in taxable income until it is distributed—and it is never included in income for qualified Roth IRA distributions.

Calculate taxable vs tax deferred vs tax-free investments

In this example, Emma effectively has 20 percent more assets working for her in the IRA, once she factors in the tax that applies to the non-qualified account. This single difference with IRAs creates a built-in hedge against inflation, at least in relation to other types of accounts.


2. Watch Your Rate of Return for All Investments

Despite IRAs’ advantages over non-qualified accounts, they still don’t necessarily solve the inflation problem. If someone has IRA earnings that match the overall inflation rate over the past 60 years, that simply means that whatever’s in the IRA will be able to purchase the same goods and services that it could when the IRA contributions were made. A simple example may help.

Maximize Return Rates 

Jack rolls over $100,000 into his IRA and never contributes more. His interest rate is 3.8% (the average long-term inflation rate), compounded annually. After 30 years, his account is worth $306,140, but with inflation, he will likely be able to purchase only about the same goods and services as when he made the initial investment.

If Jack’s rate of return was 7%, not only would he have outpaced inflation but his balance would have been $761,226 before taxes.   

Calculate Tax-Deferred Growth

Historically, IRAs with traditional assets hold return rates between 7 to 10% which is very dependent upon the underlying assets. Depending on the term of a certificate of deposit (CD) at a depository bank or credit union, a current interest rate of between 4 and 5% is typical. These rates barely exceed the long-term inflation rate, and so will help an IRA maintain its value when factoring in inflation, but will not increase long-term purchasing power much. 


3. Empower Your Portfolio with Alternatives 

Historically, alternative assets have demonstrated remarkable performance over the long term. For instance, over a 20-year span until 2022, private equity investments boasted an average annual return of 14.75%, surpassing the 9.25% of the S&P 500 and the 8.84% of the Dow Industrial average. However, it’s crucial to recognize that alternative investment earnings are not guaranteed, and there’s still a risk of financial loss. It’s essential to carefully evaluate your investment choices, ideally with the guidance of a knowledgeable professional. Nevertheless, the potential benefits of SDIRAs are significant. By selecting investments aligned with your risk tolerance and long-term goals, your self-directed IRA can serve as a tool to combat inflation and contribute to a more secure retirement. This underscores why self-directed IRAs (SDIRAs) are highly effective in mitigating the impact of inflation on retirement savings. The opportunity to surpass the average inflation rate through SDIRAs renders them an appealing option. Learn more about what STRATA’s clients have to say about alternatives in STRATA’s 2023 Investor Survey Report



STRATA’s  Retirement Planning Calculators can help you prep for an in-depth discussion with your financial advisor to ensure your retirement savings are on track to match your retirement spending. In addition, our SDIRA experts are always here to help answer any questions you may have about the custody of alternative assets—don’t hesitate to contact us.

Chart Data Sources:

1 Annual U.S. CPI Change and Inflation Rates

2Annual U.S. Energy and Food Inflation Rates

31 Million Dollars = 22 Years 9 Months of Retirement

Tags: all things retirement, alternative investments, retirement, tax strategy