Inflation doesn’t magically go away, but there are ways to protect yourself, now and later, from its impact.
Raising Federal Reserve interest rates is a limited tool to fight inflation. Rising rates also take time to affect the whole economy. Experts say inflation will be there for a while – possibly until the end of next year.
This is also what consumers expect. The vast majority of Americans (80%) fear rising inflation will continue to negatively impact the purchasing power of their income over the next six months, according to the latest quarterly market perceptions survey. of Allianz Life (opens in a new tab).(1)
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What is concerning is the number of Americans who seem unprepared for this period of historic inflation. More than half (54%) of respondents said they stopped or reduced their retirement savings due to inflation. And 43% said they had to dip into their retirement savings due to rising inflation.
Social Security among lifetime benefits that help offset inflation
An important signal of the effect of inflation is the almost unprecedented cost-of-living adjustment to Social Security payments this year. Social Security payments will increase nearly 8.7% next year. It will be the largest increase in Social Security checks since 1981, according to the Social Security Administration (opens in a new tab).
This makes Social Security one of the only benefits people receive in their lifetime that can help offset inflation. Some annuity products also have the ability to increase income payments to lessen the effect of inflation.
Even if you are eligible but not yet collecting Social Security, you are not missing out on the raise. Don’t panic and think you better start claiming it to cash out. This increase, and other future cost-of-living adjustments, will be added to your estimated future benefits if you are age 62 or older.
Consumer behavior affects inflation
In the coming months, how inflation moderates over time will depend in part on everyday consumer actions. If we expect inflation to continue, and act as if it does, the power of a dollar will continue to decline. It can be a self-fulfilling prophecy.
Here we will talk about what you can do in the short term and your future to protect yourself from the risk of inflation.
What you can do in the short term
Here’s the problem: how long high inflation lasts depends on consumer behavior. People, in general, are still spending a lot of money even though the Federal Reserve has raised interest rates.
A good way to control your finances in times of inflation is to delay major purchases. It also allows you to avoid incurring new debts.
At the same time, many products are about to be marked down. At the height of the COVID-19 pandemic, Americans bought a lot of consumer goods. Many big box stores did not have enough items like televisions. And people who spent most of their time at home wanted new televisions.
Retailers have ordered more inventory, but with the pandemic now easing, fewer people are excited to buy a new TV. So retailers have a glut of inventory that will be put up for sale to sell.
While it’s tempting to buy a TV on sale for a low price, think before you buy. It’s more important to do boring things with your money, like making sure you have a solid cash reserve and avoiding paying interest on credit card balances.
Remember this – just because you bought it on sale doesn’t mean you saved any money. You have spent money! And if you buy it with a credit card, the purchase might end up costing you more than the original price.
Yet short-term actions like spend-free months won’t get you to long-term financial well-being if this record inflation continues.
What you can do in the long term
Inflation is not going away tomorrow. You need to start hedging against inflation risk. Three in four Americans (75%) said in the Allianz study that they were worried about the rising cost of living affecting their retirement plans. You don’t want to have to work longer than expected or take on a second job.
Consider continuing to invest, contribute to your 401(k), and make other financial decisions on behalf of your future self. Allianz Life’s latest study found that the youngest age cohort – millennials – were the most likely to say they had stopped or reduced their retirement savings due to inflation. While 65% of Millennials said they had reduced or stopped their retirement savings, 59% of Gen Xers and 40% of Boomers said the same.
Since Millennials have more time until retirement, the money saved now is even more important because it will have more time to grow. These are years of key economy.
Now might also be a good time to meet with a finance professional. They can help you develop a strategy to help you deal with the effects of inflation now and prepare for a strong financial future. You’ll want to consider how your investments can help you maintain your purchasing power over time and discuss the asset mix of your portfolio.
Planning for the future is essential. Talk to a financial professional about adding protection to your portfolio to help mitigate the risk that long-term inflation will affect your retirement.
(1) Allianz Life conducted an online survey, the Third Quarter 2022 Quarterly Market Perceptions Study, in September 2022 with a nationally representative sample of 1,004 respondents aged 18 and over.
This content is for general educational purposes only. However, it is not intended to provide fiduciary, tax or legal advice and may not be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliates and their representatives and employees do not render fiduciary, tax or legal advice or advice related to Social Security or Medicare. Clients are encouraged to consult their tax advisor or attorney or the office of the Social Security Administration (SSA) for their particular circumstances.
Coverage is backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. The variable annuity guarantees do not apply to the performance of the variable sub-accounts, which will fluctuate according to market conditions.
Products are issued by Allianz Life Insurance Company of North America. Variable products are distributed by its subsidiary, Allianz Life Financial Services, LLC, Member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427 www.allianzlife.com
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).