The Impact of Inflation in Retirement

Written by Kevin P. Gilmore
From the Director

The Social Security Administration (SSA) recently announced the cost-of-living-adjustment (COLA) for 2022 will be 5.9%. This is welcome news for the 64 million Americans whose retirement income is supplemented by Social Security (SS) benefits. This is the largest percentage adjustment since 1982 when it increased by 7.4%. From 1975 through 2021, the annual COLA has ranged from 0% (which occurred three times) to a high of 14.3% (in 1980), with a 3.63% average over that period. The average increase over the past 10 years was 1.65%, and the adjustment for 2021 was only 1.3%. The historically larger COLA for 2022, which is 3.6x higher than the average for the prior 10 years, is a reflection of our current economic realities as we battle against rising inflation in a manner we have not experienced in some time.

Prior to 1975, SS benefits were adjusted infrequently and only through a specific act of Congress. Legislation was enacted in 1972 which called for the annual COLA to be based on the increase in the Consumer Price Index as determined by the Department of Labor and Statistics. If you receive SS, you will likely have already been notified about the change in your benefits by the time this article is published. If not, you can always find out about your specific situation through the SSA’s “My Social Security” system.

One of the benefits provided to you by PBUSA is the presentation of educational webinars and materials through our partners at Fidelity Investments. These presentations focus on the importance of planning for retirement and include preparing for the effects of inflation. The final two webinars for this year addressed the issues of understanding the basics of how and when to claim SS benefits and then a deeper dive into how to maximize those benefits in your retirement strategy. All these sessions, and many others, are available to you on-demand and free of charge through Fidelity NetBenefits. In addition, licensed Fidelity advisors are available to answer questions and provide further guidance regarding your specific situation by phoning 866-NAZAREN (866-629-2736). If you do not have your own personal financial advisor, we would strongly encourage you to reach out to Fidelity for help and professional guidance.

Planning for the effects of inflation in your retirement savings strategy is critical. If you are not sure where to start or how to come up with a reasonable rate, consider using an average of 3% per year, or higher if you choose to plan more conservatively. Your investment returns need to earn an average of at least 3% simply to cover the anticipated increases in cost of living. Anything above 3% is considered adding to your available net assets in retirement. The 3% figure I reference comes from the history of time for which PBUSA has existed. We were originally founded in 1919 as the Board of Ministerial Relief and the average rate of inflation from 1919 through 2020 was 2.74%. Again, the fact we are now at a nearly 6% COLA for Social Security shows the significance of our current economic situation.

Kevin P. Gilmore is director of Pensions and Benefits USA for the Church of the Nazarene.