Rampant inflation and rising consumer prices aren’t just impacting Americans’ finances today, it’s worrying them about tomorrow. Americans now view inflation as the biggest financial threat to their retirement plans, according to a recent survey conducted by Allianz Life Insurance Company.
For its annual New Year’s Resolutions Study, Allianz Life polled a nationally representative sample of 1,115 respondents ages 18 years or older in November. While inflation has become the top retirement worry for Americans, fewer people in 2021 said they are more likely to seek financial advice in the year ahead than in 2020.
A financial advisor can help steer your portfolio through times of heightened inflation and economic volatility. Find a trusted advisor today.
Inflation Takes Center Stage
A quarter of respondents in the Allianz Life survey said rising inflation is the single most significant threat to their retirement plans, a three-fold increase from a year earlier when only 8% identified inflation as their primary concern.
But as Americans appear more anxious about inflation, they’re less worried about other risk factors. In 2020, 13% percent of respondents to the Allianz Life survey listed increased healthcare spending as the main risk they’ll face in retirement, while another 12% said job security was their biggest concern. This year however, only 8% listed increased healthcare costs as the biggest risk they face in retirement and 7% said the same about job security.
A renewed focus on inflation’s impact on retirement should come as no surprise. Consumer prices have been on the rise throughout most of 2021 going from 1.4% in January to 4.2% in April. The upward trend continued throughout the summer and into the fall. In November, consumer prices were 6.8% higher than they were a year earlier, marking the largest 12-month increase since June 1982.
Inflation can pose an acute risk to retirees, reliant on fixed incomes now that their earning years are behind them. Rising consumer prices means that the purchasing power of retirees is diminished.
Why Inflation Is Rising
What’s causing the surge in prices? Well, it’s complicated. The recent jump in inflation is a byproduct of an economy that has roared back to life from pandemic-related shutdowns, as well as massive government stimulus that pumped hundreds of billions of dollars directly into Americans’ bank accounts. Increased consumer demand has led to supply chain disruptions, shortages of goods and elevated prices.
Energy costs have skyrocketed over the last 12 months, rising 33.3%, according to data from the Bureau of Labor Statistics. Used cars and vehicles are 31.4% more expensive than they were a year ago, while medical care services have risen the least during the same time period, increasing only 2.1%.
How to Hedge Against Inflation
While Americans are increasingly worried about the impact that rising prices will have on their retirement plans, fewer will seek out professional advice than a year ago. Only 22% of respondents in the Allianz Life survey said they are more likely to seek the advice of a financial professional in 2022, down from 27% last year.
“This confidence could be a reflection of the fact that more people seem to be active in managing their finances – both in eliminating bad financial habits as well as establishing positive behaviors,” the company wrote, adding that the top bad financial habits from 2020 declined in 2021.
Beyond working with a financial advisor, those planning for retirement can make several moves within their portfolio in an attempt to ward off the negative impacts of inflation. While equities, real estate and gold have traditionally been viewed as inflation hedge, investors can also look into adding commodities to their portfolios. Researchers at Vanguard found that commodities rose between 7% and 9% for every 1% of unexpected inflation the economy experienced over the last decade, making them a strong hedge against hyper inflation.
Treasury inflation-protected securities or TIPS can also be a useful component of a portfolio. These bonds, which pay out interest twice a year, are indexed for inflation, so they rise in value when consumer prices increase and become less valuable during times of deflation.
Bottom Line
A year ago, Americans said running out of money and rising healthcare costs represented the largest threats to their retirement plans. In 2021, however, Americans now view rising inflation as the single most significant risk to their eventual retirements. An Allianz Life survey found that 25% of respondents said rising inflation is their top concerns, that’s more than three-times as many who said so last year. The survey comes on the heels of a tumultuous year for consumer prices, with inflation reaching 6.8% in November.
Tips for Managing Your Retirement Nest Egg
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Sometimes it pays to work with a professional. A financial advisor can help you diversify your portfolio based on your goals and time horizon. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s Retirement Calculator can help you determine how much money you’ll have for retirement according to your age, income and other factors.
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There’s been a lot of talk on Capitol Hill regarding the United States’ retirement system. See how President Biden’s “Build Back Better” plan could impact your retirement plan.
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