It’s difficult to plan for retirement when the cost of living keeps climbing and inflation doesn’t stay at a predictable rate. Add in economic uncertainty such as the current high-tariff economy, and it’s hard for anyone to accurately predict how much they’ll need when they retire no matter how close to that stage of life they are.
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While you may not be able to accurately predict where the economy will be when you retire, you can put into place some basic plans that hedge against inflation.
Experts recommended some tips for building a realistic retirement plan even when costs continue to climb.
The first thing to do is embrace the reality that change is inevitable, according to William London, a business attorney and partner at Kimura London & White LLP.
“Rising living expenses, healthcare inflation and housing volatility aren’t short-term trends, they’re realities retirees must account for,” he said.
One of the biggest mistakes he sees is assuming that past models will work “unchanged.” If anything, “today’s economy demands more conservative spending assumptions, more aggressive inflation protection and a greater emphasis on healthcare planning,” he said.
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London recommended building a detailed, “honest budget” based on today’s real numbers, not outdated rules of thumb or broad guesses.
“From there, apply a modest but realistic inflation assumption,” he said. Many planners use 2% to 3% annually for general costs, but for healthcare expenses, he suggested planning for 5% to 6% growth given recent trends.
It’s tempting to try to “perfectly” predict future expenses, but accuracy comes from really paying attention to the trends in the specific spending categories that will affect you most, London said. For example, housing costs might stabilize if you own your home, but healthcare costs are likely to accelerate.
Rob Burnette, an investment advisor representative and professional tax preparer at Outlook Financial Center, suggested there really is no accurate estimation for the long-term in any environment. He pointed to inflation extremes over the past 30 years that have ranged from near zero to over 9%.
“The best you can do is make reasonable assumptions for the future and regularly compare actual expenses to your projections. Adjust as needed.”
As much as possible, do your best to build in a buffer of at least 10% to 20% over your expected annual spending needs, London recommended. He suggested you think of it as an “inflation reserve” that sits outside of your regular withdrawal plan — available to tap when prices spike or unexpected costs arise.
Don’t let your buffer drag behind inflation, either, according to Cetin Duransoy, the U.S. CEO of Raisin, a savings marketplace. The erosion of inflation compounds over time, he warned. “Less money in your account means it will take even longer to reach your retirement savings goals.”
Not all bank accounts are created equal, as well, he said. Prioritize safe, guaranteed investments like CDs and high-yield savings accounts to earn interest and fight inflation, and tax-advantaged retirement accounts to grow your money in the market. Saving consistently is most important.
Additionally, certain investments can help better protect retirement savings against inflation, London said. Investments like TIPS (Treasury Inflation-Protected Securities), dividend-paying stocks, real estate assets and limited commodities can all offer “inflation hedges,” he said. Of course, portfolio diversification remains critical to keeping risks low and growth high.
Despite the best laid plans, if you feel you’re falling behind due to inflation, the worst thing you can do is freeze and stop saving, London warned.
“Even small increases in savings, delayed retirement by even a year, or part-time work in early retirement can dramatically improve financial security over time,” he said.
If your savings goals are at war with high-interest debt, then prioritize paying off that debt before retirement, London urged.
However, when it comes to low-interest debt like a mortgage, you have some options. “If investment returns are likely to outpace loan interest rates, maintaining some debt while boosting retirement savings could make sense,” he said.
It’s often a case-by-case decision, influenced by risk tolerance and cash flow needs.
London recommended setting a habit of reviewing your retirement plan annually, preferably tied to your birthday or another consistent date.
“Use tools that project different inflation and market return scenarios, which you might want to see a financial advisor for.
Benchmarks like “safe withdrawal rate,” “expected vs. actual spending” and “portfolio growth vs. inflation” are critical metrics to track year over year.
Retirees are often coached to take out a “safe” withdrawal rate from their retirement accounts, but Burnette warned that there is no such thing “in any economy.” Think beyond a generic number, such as the “4% rule” and consider factors such as longevity, retirement lifestyle and guaranteed income streams to name a few, he said.
“You want your money to last longer than you do. Too many people try to live an outsized lifestyle in retirement and pay too little attention to how long the funds will last.”
At the end of the day, retirement planning isn’t about perfection — it’s about preparation. The goal isn’t to guess exactly how costs will rise; it’s to build a resilient enough plan to thrive, no matter how the economic winds shift.
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This article originally appeared on GOBankingRates.com: How To Build a Realistic Retirement Plan When Costs Keep Climbing
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