Inflation won’t magically disappear, but there are ways to help protect yourself from its effects, now and in the future.
Raising interest rates by the Federal Reserve is a limited tool to fight inflation. Interest rate hikes also take time to affect the broader economy. Experts say inflation will be around for some time to come, possibly until the end of next year.
It’s what consumers expect, too. The vast majority of Americans (80%) worry that rising inflation will continue to have a negative impact on the purchasing power of their income over the next six months, according to Allianz Life’s most recent quarterly market perception study. (opens in new tab).(1)
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What is troubling is how many Americans seem unprepared for this period of historic inflation. More than half of respondents (54%) said they have stopped or reduced retirement savings because of inflation. And 43% said they had to cut their retirement savings because of rising inflation.
Social Security is among the lifetime benefits that help offset inflation
One big signal of the impact of inflation is the almost unprecedented cost-of-living adjustment made to Social Security payments this year. Social security payments will increase by about 8.7% next year. That would be the largest increase in Social Security checks since 1981, according to the Social Security Administration (opens in new tab).
This makes Social Security one of the only benefits people receive during their lifetime that can help offset inflation. Some annuity products also have the ability to increase income payments to cushion the impact of inflation.
Even if you’re eligible but not yet collecting Social Security, you don’t miss an increase. Don’t panic and think you better start claiming it for cash. This increase and future cost-of-living adjustments will be added to your estimated future benefits if you are age 62 or older.
Consumer behavior affects inflation
The easing of inflation in the coming months will depend in part on the actions of everyday consumers over time. If we expect inflation to continue, and act as if it will, the strength of the dollar will continue to decline. It could be a self-fulfilling prophecy.
Here we’ll talk about what you can do in the short term and looking ahead to protect yourself from inflation risk.
What can you do in the short term?
Here’s the thing. how long we experience high inflation depends on consumer behavior. People are generally still spending a lot of money, even though the Federal Reserve has raised interest rates.
A good way to keep your finances in check during times of inflation is to delay major purchases. This also helps you avoid taking on new debt.
At the same time, many products will be marked. At the height of the COVID-19 pandemic, Americans were buying a lot of consumer goods. Most big box stores did not have enough stock of items like televisions. And people who spent almost all their time at home wanted new TVs.
Retailers have ordered more inventory, but fewer people are excited to buy a new TV because of the pandemic. So retailers have a lot of inventory that will go on sale in order to sell it.
Although it’s tempting to buy a TV on sale for a low price, think before you buy. It’s more important to do the boring stuff with your money, like making sure you have a solid cash reserve and avoiding interest charges on credit card balances.
Remember this. just because you bought it on sale doesn’t mean you saved money. You spent money. And if you buy it with a credit card, the purchase may cost more than the original price.
However, short-term actions such as spending-free months will not set you up for long-term financial well-being if this record inflation continues.
What can you do in the long run?
Inflation will not disappear tomorrow. You need to start protecting yourself against inflation risk. Three in four Americans (75%) said in the Allianz study that they are concerned about rising retirement costs impacting retirement plans. You don’t want to have to work longer than planned or have to 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. A recent study by Allianz Life found that the youngest age group, Millennials, were the most likely to say they have stopped or reduced retirement savings due to inflation. While 65% of Millennials said they have reduced or stopped saving for retirement, 59% of Gen Xers and 40% of Boomers said the same.
Because Millennials have more time until retirement, money saved now is even more important because it will have longer to grow. These are key saving years.
Now may also be a good time to meet with a financial professional. They can help you develop a strategy to help address the effects of inflation now and help you create a strong financial future. You’ll want to research how your investments can help maintain your purchasing power over time and consider the mix of assets in your portfolio.
Planning for the future is important. Talk to a financial professional about adding some protection to your portfolio to help mitigate the risk of long-term inflation affecting your retirement.
(1) Allianz Life conducted an online survey in September 2022, Quarterly Market Perception Study 2022, with a nationally representative sample of 1,004 respondents aged 18+.
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 offer any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliates, and their representatives and employees do not provide fiduciary, tax, or legal advice or counsel related to Social Security or Medicare. Customers are encouraged to consult their tax advisor or attorney or a Social Security Administration (SSA) office for their specific situation.
The guarantees are backed by the financial strength and claims paying ability of Allianz Life Insurance Company of North America. Variable Annuity Guarantees do not apply to the performance of variable sub-accounts, which will fluctuate with market conditions.
Products are issued by Allianz Life Insurance Company of North America. Variable products are distributed by its affiliate, 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 represents the views of our contributing advisor, not Kiplinger’s editors. You can check the adviser’s records with the SEC (opens in new tab) or with FINRA (opens in new tab).