Today’s question is: What is inflation and why is it important to account for in my retirement plan? Inflation is the rising cost of goods over time. Meaning, it will cost you more money next year than it does this year to buy a car or a dozen eggs.

But why is it important to factor into retirement planning? Learn more about how inflation can impact your financial future in this week’s Money Wisdom Question Series with Jake Doser, CFP®, CPWA®.

Why Social Security and Pensions May Not Be Enough

A significant portion of fixed income, including Social Security and pensions, often can’t keep pace with the rising cost of goods and services. While Social Security benefits do increase each year through cost-of-living adjustments (COLAs), they often fall short of actual inflation. Pensions, on the other hand, typically lack any COLA, making them even more vulnerable to the rising cost of living.

Supplementing Income with Savings

If your income from Social Security and any pensions doesn’t fully cover your expenses, the difference has to come from what you’ve saved, whether that’s in a 401(k), an IRA, or other investment accounts. Those funds not only need to cover your monthly shortfall, but they also must keep up with inflation over time.

Why Growth Is Important

It’s important to have a portfolio with some growth orientation. That doesn’t mean you need to take on a high level of risk, nor should you avoid risk altogether. Taking on too much risk can mean big losses at the wrong time, making it difficult to cover your monthly expenses without hurting your financial stability. On the flip side, taking too little risk may keep you from outpacing inflation. There needs to be a balance.

Having a retirement income plan in place can help you understand how much of your money needs to be kept safe, how much should be focused on generating income, and how much should be growth-oriented to help combat inflation over time.