December 9, 2023

As consumer prices rose at an all-time high last year, many wealth management experts warned they would eat into retirement savings. Now, two studies confirm that dire prediction — and the damage is profound.

For workers still saving for retirement, inflation takes a bite out of their nest egg. 25% of U.S. workers cut retirement savings in 2022 due to rising costs of goods and services a new study TIAA is an international insurance company headquartered in New York. Almost half — 12 percent — stopped saving altogether.

“It’s shocking,” said Surya Kolluri, director of the TIAA Institute, the insurer’s research arm.

For those who have retired, inflation has also weakened their financial situation. Senior Citizens League, a Virginia-based advocacy group being investigated 1,055 seniors aged 55 and over. Among this group, 26% of seniors depleted their retirement accounts in the first quarter of 2023 — up from 20% in the third quarter of 2022. Perhaps more worryingly, 49% spent their emergency savings last quarter — up from 38% in 2022.

“It’s putting a lot of pressure on people,” said Mary Johnson, a Social Security policy analyst at the Coalition. “Retirees deplete their retirement savings as they age, but inflation seems to accelerate this process.”

Last year, prices soared at a pace not seen in a generation. According to statistics, in June 2022, the 12-month increase in the consumer price index reached 9.1% Bureau of Labor Statistics — the highest level since the early 1980s. As of March, CPI has stabilized at 5% after the Federal Reserve raised interest rates several times.

But there are many ways to measure or experience inflation, and for many Americans, the storm is not over. For example, food prices are still rising at an 8.5% pace and housing costs are still climbing at an 8.2% pace, according to the same data from the US Bureau of Labor Statistics in March.

As a result, many Americans are struggling to make ends meet. TIAA found that 39% of workers don’t have enough savings (besides their retirement plan) to cover a month’s worth of expenses by 2022. That’s a significant jump from 2021, when only 32% said that.

Even if inflation continues to cool, cuts to retirement savings last year could have long-lasting effects.

“That’s money that’s not being saved, so it’s not there and it’s not growing,” said Paul Yakoboski, a senior economist at the TIAA Institute. “It’s just being lost.”

Another example of such long-term damage is debt. In January 2022, 20% of workers told TIAA that their debt “prevents them from adequately addressing other financial priorities.” This number rose to 26% in January 2023, after a year of severe inflation .

The situation is similar for retired Americans. The Senior Citizens League asked its respondents (97% of whom receive Social Security benefits) if they owed more than 90 days on a credit card. In 2022, 35% will answer “yes”. In 2023, 45% will do so—the highest percentage ever recorded in the survey.

“The number of people reporting that they hold balances has increased significantly,” Johnson said, adding that interest rates are at historically high levels. “Now is not the time to do that!”

Can retirement savers bounce back? Kolluri thinks they can, but they need help from wealth managers.

“When someone is navigating their life journey, the most important thing they can get is advice and advice from a financial advisor,” Kolluri said. “Inflation, of course, plays a pernicious role in the financial journey.”

have many tips Advisors can help their clients cope with rising prices. One is to invest in assets and accounts that actually benefit from inflation, such as bonds, certificates of deposit, and high-yield savings accounts.For example, American Express currently offers savings accounts 3.75% interestthe current yield on the six-month U.S. Treasury note more than 5%.

Some wealth managers are recommending doubling down on stocks even as markets remain volatile. Over a long period of time — though not always — the U.S. stock market tends to outpace inflation, and dividends can be used to cover rising expenses.

“It doesn’t matter if you’re retired or you’ve been retired for more than 20 years,” says Nicholas Bunio, a certified financial planner Retirement Wealth Advisor in Downingtown, Pennsylvania. “You should never completely shy away from stocks.”

Most importantly, advisors can help clients think realistically about inflation. With more information and guidance, investors can budget for rising prices in their day-to-day lives and factor them into their retirement plans.

“Clients always need to build a buffer into their retirement projections, and it’s for this situation,” says certified financial planner and founder Laurie Allen. Los Angeles Wealth Management in Long Beach, California. “If your retirement plan is barely working, you may not be ready to retire.”