Inflation continues to hit levels not seen since the '80s, causing people to pause on major life events, including retirement, a 2022 survey by the Nationwide Retirement Institute shows.
A May 2022 survey from BMO found that inflation has caused 21% of Americans to reduce retirement savings, and a quarter of respondents reported needing to delay retirement due to increased expenses.
"Some of our clients had previously planned to retire early, but the current economic downturn and high inflation levels are causing them to pause on that plan," said Tyler Bohannan, financial planner at BOK Financial®. "Many of those individuals are realizing how costly health care expenses are while also seeing the cost of basic necessities increase."
The most common response to inflationary pressure among clients who have not yet retired was to cut discretionary spending, especially on things like travel. But for those who are already living on their retirement funds, it may be a different story.
"I've been in some rather tense conversations with clients who have already retired and don't want to adjust their lifestyle, but inflation is forcing them to do so," Bohannan said.
People who are retired and living on fixed incomes are definitely feeling a pinch right now, said Kimberly Bridges, director of financial planning at BOK Financial. Pensions and annuities are among the fixed retirement income categories, while Social Security and military pensions, for example, are adjusted for inflation. "Inflation kills a fixed income," she said, "as spending power declines."
Bridges and her financial planning team typically stress-test financial plans by factoring in periods of high inflation. "We typically model increased inflation over several years, allowing clients to see how sensitive their plan is to a rise in inflation," she said. "High inflation for a couple of years seldom breaks a plan. However, if it persists over the long-term it certainly could."
Inflation "makes everything more expensive," Bridges explained, "If you need to pull more money out of your portfolio to cover those added costs, the impact really comes into play when the expenses increase more than your annual portfolio earnings. If you're dipping into principle, that's a problem, especially if it continues for a long time."
This is especially relevant during what Bridges calls the "fragile decade" – the period from five years before retirement to five years after. That decade can have a significant impact on your long-term financial success, she said.
"During this period of time, you typically want to be extra cautious. Consider cutting discretionary spending rather than dipping into your portfolio principal to cover higher prices. Or think about re-entering the workforce for a spell."
Don't fall off the cliff
We hear a lot of talk in our industry about the 'retirement cliff,' said Bridges. "So much of our life purpose comes from our work and, for many, when they hit that highly anticipated retirement date, it feels like they've dropped off a cliff when they stop working."
Bridges suggests that even as you approach the grand send-off into retired bliss, keep your skills current, stay connected to your network and stay in tune with your industry. "If something bad happens, you want to be able to jump back in, even if it's just for a year or two."
Or consider phasing your retirement, which is a frequent discussion in the financial planning industry. With this approach, you create a path toward retirement that allows you to limit your hours, but still be engaged for a set period of time.
"Between the pandemic, more flexible work opportunities and current labor conditions, many people who were expecting to retire right now are taking a look at the concept of phased retirement," Bridges said. "Making the transition in stages allows you to adjust to new realities in a gradual way."
"In fact, our company offers a program that allows retirement-eligible employees the opportunity to transition to full retirement by working a flexible or reduced schedule for a period of time," she added.
Those approaching retirement typically have the most institutional knowledge and provide value, even when working part time. However, a phased retirement looks different for everyone—limiting hours or cutting out stressful job responsibilities if your company allows it, starting a consulting business, or maybe even pursuing a new job based on your personal interests.
"These are all important conversations to have with your financial planner," Bridges said. "Determining what your ideal life looks like after retirement gives you something to work for with your financial plan, but may also change as you approach that significant milestone date. And, if you haven't worked with an advisor, volatile conditions like the current inflation situation may be a good reason to start."
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