The high inflation has decreased in April, which might offer some relief to consumers dealing with high prices. However, higher-than-usual inflation brings new challenges for retirees and those nearing retirement.
The Challenges for Older Generation
Many retirees depend on Social Security, which is adjusted yearly to match rising costs and provide some protection against inflation. This year, beneficiaries received a 3.2% increase in their benefits.
Mary Johnson, an expert in Social Security and Medicare policy, said that based on recent inflation data, Social Security’s cost-of-living adjustment (COLA) for 2025 could be around 3.2%. However, this estimate could change before the official announcement in October. According to The Senior Citizens League, the average COLA has been 2.6% over the last 20 years.
Laura Quinby, a senior research economist at the Center for Retirement Research at Boston College, said that while Social Security benefits are being changed to match rising costs, the results might be different for each person based on their expenses and location. She added that for most households, Social Security accounts for about 90% of the increased costs annually.
The New Statistics on Inflation
Since inflation has increased in 2021, retirees have faced difficulties managing their expenses despite getting inflation-adjusted benefits. Similarly, individuals near retirement have started facing challenges in planning for their future because of the high cost of living. This has led to decreased current spending and reduced their ability to build wealth for the future.
Studies from the Center for Retirement Research revealed the effects of inflation on near-retirees below 62 and retirees aged 62 and above. They showed that inflation depends on whether their income and investments can match the rate of price hikes and the extent of fixed-rate debt they carry.
Inflation can affect household wealth through various investment assets. While bonds may see price increases, stocks do well if the economy remains strong. Wealthier households, typically more invested in stocks, do better during inflation. However, retirees who have fixed-income sources like pensions may face challenges.
Near-retirees depend on their work earnings, making them vulnerable if salaries do not match inflation. Wealthier ones may have income from investments or businesses that adjust for inflation; on the other hand, some rely on pensions. Those with fixed-rate mortgages benefit as their payments are steady, which is advantageous for near-retirees, who are more likely to still have mortgages than retirees.
When prices continue to increase due to inflation, older households often cut back on savings and increase withdrawals to maintain their standard of living. However, this can result in a decrease in their future wealth as they spend more now to keep up with higher costs right now.
Near-retirees still working have more flexibility to keep up with inflation than retirees because they can benefit from potential wage increases. If they stay in the workforce, they may have the opportunity to offset lost savings by earning higher wages when wages go over inflation.
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