Inflation-wary employees: How employers can improve retirement security for near-retirees

Two years ago, inflation in the U.S. reached 8.9%, and although it has since come back to more normal levels, consumers around the nation felt sticker shock about a whole range of goods and services. Prices may have moderated, but many feel they are still too high for some items, and have become inflation-wary, worried that the rate will go up again.

The issue hits home especially hard for retirees, and near-retirees have also found the issue stressful as they contemplate how much they will need for retirement.

A new paper from the Center for Retirement Research at Boston College, “What Risks do Near Retirees and Retirees Face From Inflation, and How Do They React/?,” took on this issue, exploring the question of how inflation shock affects retirement security. The two researchers who authored the paper, Jean-Pierre Aubry and Laura D. Quinby, both of Boston College, wrote that high inflation does harm older households, but it does not affect all older households the same way.

“The degree of harm depends on facts such as how income and investments keep pace with rising prices, and the amount of fixed-rate debt held by the households, which declines in real terms as inflation rises,” the report said.

One strategy—adjust retirement date

The study found that in times of inflationary stress, near-retirees may delay their planned retirement, giving themselves more time to build up savings. But Quinby noted that this option may not appeal to some retirees—and may not be possible at all.

“Working longer is one of the most powerful tools to improve retirement security. It allows workers to build up more savings and reduces the number of years over which those savings must spread. And the average retirement age has been slowly trending up for decades,” she said. “However, many older workers are forced to retire earlier than planned due to health shocks or job loss. These workers will have a harder time compensating for recent inflation.”

Another strategy during inflationary times, used by people still working, is to reduce contributions to their retirement accounts in order to have more money on hand. Some even pull money out of retirement accounts. There are obvious future costs to this, and both the industry and regulators have taken steps to encourage employers to help employees deal with emergency funding needs outside of reducing their retirement savings.

Poll shows serious concerns about inflation among older Americans

The study used a survey by Greenwald research from November 2023. It polled 1,500 retirees and near retirees about their perceptions and practices during inflationary times.

It found that 54% of near-retirees and 40% of retirees reported a very substantial increase in their cost-of-living between 2021 and 2023. In addition, 30% of near-retirees said they experienced a “substantial increase” in the cost of living; 31% of retirees said the same. The study found 16% of near-retirees and 29% of retirees reported “not much increase” in their cost of living during that time period.

The survey also tracked how investments performed between 2021 and 2023. It found that 72% of near-retirees and 64% of retirees said that their investments grew less than inflation, while 11% reported that investments tracked inflation, and only 6% saw real growth.

The study found that concerns about inflation can cause people to cut back on investments and hold on to cash or move funds into investments perceived as safer. Quinby noted that such strategies are not the only options.

“Cash — and fixed investments generally — lose value during high inflation,” she said. “We think households pivot to these safe assets because they fear that high inflation will cause a recession. That said, investors can take advantage of products such as variable annuities that grow with the economy and still provide lifetime income.”

Investors could use more education on strategies to address inflation

The report concluded by noting that near-retirees who are still working when inflation hits have the most flexibility to respond. And yet the data shows that relatively few people nearing the end of their working years choose to work longer. Another strategy is re-investing assets into investments that are less subject to inflationary pressures.

Related: Bold, new investment strategies for near-retirees: What plan sponsors need to know

Quinby noted that there are solutions out there, but the new study showed that retirees and near-retirees need good advice on how to react to inflationary times. “By cutting back their saving, older households compounded the direct negative impact of inflation on retirement assets,” she said. “Yet in 2023, when we ran our survey, very few households were taking steps to shore up their finances. Advisors clearly have a role to play in helping households get back on track.”