Inflation Can and Will Deplete Your Self-Directed IRA Gains – How to Fight it

Inflation is something most Americans are thinking and talking about a lot lately. Not only does inflation impact the prices of consumer goods; but the federal government also uses it as a benchmark in determining whether to increase contribution limits to qualified retirement plans or to raise monthly Social Security benefits.

On an individual level, the inflation rate affects how much your retirement dollars will really be worth. Over time, it can take a serious bite out of your nest egg. Understanding how inflation may hurt your retirement strategy is a must for ensuring that you have enough assets to last through your later years.

​​How Much Money is at Stake?

In terms of the actual dollar amount that it can cost retirees, the numbers are startling. LIMRA Secure Retirement Institute constructed a model demonstrating the effect inflation could have on the average Social Security benefit over a period of 20 years. According to its research, a 1% inflation rate could swallow up $34,406 of retirees’ benefits. If the inflation rate were to increase to 3%, the shortfall would total more than $117,000. This chart illustrates the impact of varying inflation rates over time.

Based on a 20-year retirement period

​How Can This Be Combated?

While seniors can’t directly affect the inflation rate, there are ways to minimize the shadow it casts over their retirement.

Reducing housing costs, for instance, is a step in the right direction. Trading in a larger home for a smaller one, even if the mortgage is paid off, reduces the monthly outflow for property taxes, utilities, homeowners insurance, and maintenance.

Another smart move is adding investments to your portfolio that are likely to increase in value as inflation rises. A real estate investment trust (REIT) or energy sector stocks, for example, are better positioned to see their value grow in tandem with the inflation rate.

Just remember to balance stock investments with more conservative options, such as bonds, which are more predictable and tend to offer stable returns.

​What it Comes Down to

Inflation can be a retirement killer but it doesn’t have to be for seniors who take the time to develop a plan for beating it. Reducing spending, creating a realistic retirement budget, and leveraging investments can all help to soften the blow inflation may deal to your long-term savings.

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