Will I Outlive My Money?

Inflation could threaten the longevity of your nest egg, but there are ways to circumvent that happening.

Inflation rose 7% in the 12 months through December 2021, hitting a 40-year high. Rapidly rising inflation makes it difficult for retirees on fixed incomes to pay the bills. If you're close to or in retirement, you may wonder if you will outlive your money. By making the right financial decisions, you can make your money last a lot longer.

The market has roared back since the pandemic began. Even after the rally, there are many risks for retirees -- with people living longer and inflation skyrocketing, it is much more difficult to know how much to save for retirement. Read on for tips on coping with inflation.

Include inflation risk in your financial plan

Now is a good time to review your retirement plan and factor in the impact of inflation on expenses such as healthcare, food, and housing. A comprehensive financial plan can help ensure that your investment portfolio keeps up with the rising costs of retirement.

For 2022, Social Security increased their cost-of-living adjustment (COLA) by 5.9%, the highest in 40 years. This means that more than 70 million Americans saw a change in their benefit payments.

While the annual COLA helps those receiving benefits keep up with the increasing cost of living, it often isn't enough. It is important to invest in assets that keep up with or even surpass inflation. Those close to retiring may need to adjust their goals or increase how much they save.

Diversify your investment assets

Stocks, gold, and real estate are assets that help protect against inflation. Real estate investment trusts (REITs) are an excellent way to invest in real estate without having to purchase property outright. Most REITs also pay a dividend, so they can produce income.

Treasury inflation-protected securities (TIPS) are low-risk government-backed securities that base their return on inflation. The interest is exempt from state and local taxes, and the interest is paid every six months.

The U.S. government also offers low-risk I bonds to help protect savings from inflation. An I bond is a savings bond that earns a fixed interest rate plus an inflation rate that is set twice a year. The combined rate for I bonds issued from November 2021 through April 2022 is 7.12%.

Have a long-term outlook

While investors should prepare for moderate to high inflation for the next several years, many experts believe inflation will eventually return to normal. According to the Survey of Professional Forecasters from the Federal Reserve Bank of Philadelphia, economists expect the consumer price index (CPI) over the next 10 years to average 2.55% annually.

The key is not to let short-term market movements dictate long-term financial plans. While diversifying a retirement portfolio can help stave off inflation risk, taking on too much risk can expose investors to losses that they may not be able to recover from.

Investors can't prevent inflation, but by preparing for it, they can lower its impact. It is difficult to know exactly how much an individual needs to save for retirement. By regularly reviewing their financial plans and investment portfolios, people can make changes so they don't need to worry as much about outliving their money.