Inflation alarm bells have been ringing for a while now, sounding off in the form of grim headlines and hiked interest rates, but millions of Americans felt the impact on their wallets well before any official fanfare. Now, many people are wondering what they can do to protect their finances and retirement should things continue to go from bad to worse, especially as the very real possibility of a recession looms.
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It’s helpful to understand what inflation means when it comes to the big picture of personal finance first. Michaela Pagel, associate professor of business at Columbia University, puts it simply: “If a household is a net borrower, inflation will effectively increase the value of the household’s assets. Now, if the household is a net saver, inflation will, in principle, decrease the value of the household’s assets.”
No matter the individual circumstance, panicking won’t help the average American taxpayer retire — but careful planning will. Entrepreneur sat down with Rhian Horgan, founder and CEO of retirement platform Silvur, to discuss how people can set themselves up for long-term financial success despite the economic downturn.
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“Will my money have as much value in the future, and will I be able to afford the things I need?”
“Retirement is a long period of time for many Americans,” Horgan says. “It’s going to be 25-, 30-plus years, so maintaining your purchasing power over the course of your retirement is super important. When people hear the word inflation, they’re thinking, Will my money have as much value in the future, and will I be able to afford the things that I need?“
So, how do you safeguard your money to ensure you’re not running out of it when you need it most? Horgan recommends investing with a long-term horizon in mind, contributing to your 401k to receive any company match, and, for those over 50 years old, taking advantage of tax-deferred or tax-free catch-up contributions to a traditional or Roth IRA.
Additionally, when the market dips, it’s a great time to consider a Roth conversion: You can pull money out of a traditional IRA, pay taxes on it, then transfer it to a Roth IRA, where it can continue to grow tax-free. (Also known as a “backdoor Roth IRA,” this tip allows even those earning more than the $144,000-per-year cap to contribute).
But there’s another key retirement benefit in play that many are familiar with, yet don’t understand in full: social security. “It’s an income stream that you can receive for the rest of your life,” Horgan says, “and it actually has an annual inflation adjustment associated with it.” That makes it one of the most valuable retirement assets that someone will ever have.
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“In today’s high-inflation environment, social security will be essential to helping retirees maintain their purchasing power.”
The 2022 social security cost-of-living adjustment was the highest in nearly 40 years, and current inflation trends suggest that next year’s adjustment will be even higher — somewhere in the 9%+ range. “The automatic COLA adjustment has always been an important protection for older Americans,” Horgan explains, “and in today’s high-inflation environment, it will be essential to helping retirees maintain their purchasing power.”
Although social security will be an invaluable retirement benefit for millions of Americans, its intricacies remain somewhat of a mystery to many. Even Horgan, who’d worked in finance for more than 20 years, had to sift through a 400-page book to get the answers she needed while helping her parents plan for retirement — something the average person can’t be expected to do — and an experience that inspired her to launch Silvur.
The connection between wealth and health shouldn’t be ignored either, especially as people age and leave the workforce; Horgan notes that the average American couple spends $300,000 on Medicare over the course of retirement. But the expected passage of the Inflation Protection Act, which allows Medicare to negotiate drug costs with pharmaceutical companies for the first time and puts a cap on consumers’ out-of-pocket costs, exemplifies how the long-overdue focus on reining in drug costs will also help protect older Americans.
A lot goes into setting yourself up for a comfortable retirement, but understanding the basics of social security, which is based on your highest 35 years’ worth of earnings and can be collected beginning at age 62, is absolutely critical if you want your money to withstand inflation — that’s true whether you’re 25 or 75. And the earlier you learn the fundamentals, the better prepared you’ll be down the line, making it easier to avoid minor and major financial headaches alike.
“You can position yourself to have this income stream that has inflation protection,” Horgan says. “This is a very valuable income stream, but the devil is in the details — better to learn that now.”
Related: How to Calm Financial Panic During Inflation Surges
Here are three things you should know about this crucial retirement benefit.
You won’t get credit for years out of the workforce
Your social security credits are based on your income-earning years, so if you step away from the workforce to take care of children or other family members, you won’t receive them during that time.
“So not only are you not earning an income, but you’re also potentially dragging down your retirement benefits,” Horgan explains. “It’s really important to understand that your salary, your taxable income, impacts your future social security benefits.”
What’s more, this stipulation has a disproportionate impact on women, who make up more than 75% of all caregivers in the U.S., per the Institute on Aging, potentially spending as much as 50% more time providing care than men. The economic value of women’s informal caregiving is estimated between $148 billion and $188 billion annually.
Part-time work counts
Increasingly, Americans are swapping an I’ll work full-time until I’m 62 and then retire cold turkey mentality for one that takes the possibility of part-time work into account, Horgan says. That has lucrative potential, as part-time earnings also count towards social security.
“If they can add $1,000 a month of part-time income over five years, they can make their savings last three years longer,” Horgan explains.
Not only does part-time work make money last longer, but it also offers a way for people to use their talents and find a new sense of purpose as they enter the next stage of their life (Horgan notes that women in their 50s and 60s make the most successful Airbnb hosts).
Marital status matters
Marriage also has a significant impact on your ability to collect social security. You might be eligible for your spouse’s benefits regardless of if you’re married, widowed or divorced.
But in the case of divorce, the length of the marriage matters. You must be married for at least 10 years to receive the divorce benefit, which gives you the greater of your benefit or 50% of your ex-spouse’s benefit.
“It’s challenging when I speak with a 55-year-old woman who has gotten divorced and didn’t know the rules,” Horgan says. “It’s harder for her to optimize her benefits than someone who’s 25.”
The economy can be unpredictable, but your retirement shouldn’t be. It’s important to be realistic about how much savings you’ll need to leave the workforce comfortably — and to do what you can today to ensure your money withstands inflation tomorrow.
