If you’ve been following the news lately – or checking your credit card bills – you probably know that the cost of living is exorbitant. You can thank inflation for that.
In September, the consumer price index increased by 8.2% on an annual basis. Although this increase paved the way for a 8.7% cost of living adjustment for Social Security recipients, it’s also an indication that we’re a long way from getting relief from inflation.
If you’re about to retire, you might be wondering if inflation should impact your plans or cause you to delay exiting the labor market. The answer? It depends on your financial situation and the higher cost of living your retirement might have.
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What sources of income should you expect?
The danger of retiring when inflation is so high is that you may struggle to meet your living expenses without your regular salary. Plus, retirement might be a tougher adjustment if you start it at a time when things are so expensive.
It doesn’t mean inflation has ruin your retirement plans. And if you have a number of sources of income to look forward to, you may be able to move forward with your workforce departure without having to manage your expenses.
Let’s say you’re sitting on a decent sized nest egg. Withdrawals from savings, combined with Social Security benefits, could make your living expenses manageable, even at a time when they are on the rise.
At the same time, it is important to recognize the risks of retiring in times of runaway inflation. You may need to make larger withdrawals from your IRA or 401(k) plan than you may have originally planned. This could increase the risk that you will deplete your cash reserves over your lifetime and experience difficulty in the later stages of retirement.
You may also need to get creative with finding new sources of income in light of inflation. It could mean working part-time. But if it’s something you’re willing to do, you might do reasonably well, despite the skyrocketing cost of living.
What adjustments can you make to your retirement plans?
While the sources of income you have may dictate whether a short-term retirement is a chance given inflation, it’s not the only thing to consider. Also think about what you want to look like in retirement and whether it is possible or desirable to change your plans.
Maybe your goal in retiring soon is to travel a lot. If you think you can’t afford it, you may decide it makes more sense to keep working and wait for the cost of living to drop. But if you have simpler retirement plans, a few tweaks could make short-term retirement possible, despite inflation.
Unfortunately, we don’t know when inflation levels will start to fall. And we could live for many more months with an exorbitant cost of living. For a near-retiree, this could easily pose a challenge. But think about the tools you have (like extra sources of income) to fight inflation, and also think about the different steps you can take to counter it before deciding whether your retirement should be delayed.
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