Inflation is making headlines, not just in the United States but around the world. As the pandemic winds down, consumers are returning to their former buying patterns, create a surge in demand. Suppliers are having difficulty meeting that demand, in part because it takes time to gear up production, in part because the economy is facing a shortage of workers. Congested ports and other kinks in the supply chain are delaying the arrival of products in the marketplace, while Russia’s war with Ukraine has contributing to rising gas prices.

None of those problems lend themselves to a quick solution. For many Americans, price inflation will be partially offset by wage inflation. A shortage of workers has sparked higher earnings, which may help consumers pay higher prices. Unfortunately, retirees who live on fixed incomes may not have the opportunity to benefit from rising wages.

Retirement Income

Ideally, retirees depend on a “three-legged stool” of Social Security, a retirement plan, and savings or investments to fund their retirement. At least one authoritative source  estimates that 40% of retirees depend only on Social Security for their income, although some commentators dispute that statistic. 

Even when all legs of the stool are present, the stool can become wobbly as savings and retirement plan balances diminish. Rising prices force retirees to spend their income more rapidly, placing stress on their retirement security. 

While Social Security is indexed to inflation, cost-of-living adjustments are based on the previous year’s data. Retirees must therefore bear high prices for a length of time before their Social Security income adjusts to match the consumer inflation rate. As a policy analyst for the Senior Citizen’s League explains, retirees will “likely have to draw down extra money from a pension or other investments to make up the difference for record high costs.” 

In addition, the index that determines Social Security benefit increases is weighted toward consumer goods. Older consumers spend much of their money on health care, including expenses that Medicare does not cover. At the moment, the cost of consumer goods is rising more quickly than the expense of health care, but that could soon change.

Coping with Inflation

Drawing down investments that are intended to produce income throughout retirement years might cause a shortage of income when retirees need it the most — during less productive years when they need caregivers and have lost the ability to earn extra income. Living with inflation without tapping savings or taking more out of retirement plans is a key to maximizing retirement security.

Until age 70, delaying the receipt of Social Security benefits increases the amount of the monthly benefit a retiree will receive. Older people who are contemplating retirement might want to continue working until inflation eases. The nation’s shortage of workers might also create opportunities for retirees to take a part-time job or to create a freelance job that markets the senior’s skills.

Whenever the economy changes, it makes sense to talk to an investment advisor about adjusting retirement savings. It might be prudent to hedge against inflation by selling volatile stocks and investing in inflation-protected securities or I bonds. Since different advisors assess risk in different ways, retirees might want to select an advisor who understands that safety is a higher priority than growth for older investors who depend on their investment income to help them meet their daily needs.