Inflation Tops Retirement Worries for Americans, but Financial Advisors Disagree
Written by
Gabrielle Olya
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Planning for retirement means preparing for risks that could derail your financial security — but Americans and financial advisors don’t agree on what those risks are. A new report from the Alliance for Lifetime Income reveals a surprising disconnect that may be putting long-term security in jeopardy.
According to average Americans and their advisors, here’s a look at the biggest retirement risks.
Why Americans Fear Inflation Most
According to the report, consumers’ No. 1 concern when it comes to retirement is inflation, with 63% seeing this as a retirement risk. However, advisors don’t list inflation as a top risk at all. Instead, they see the biggest retirement risks as outliving savings (56%) and market volatility (51%).
“Despite the obvious disconnect, both are right for different reasons,” said Cyrus Bamji, chief strategy and communications officer at the Alliance for Lifetime Income. “Consumers and advisors emphasize different risks because they feel, experience and understand them from different perspectives.”
Bamji noted that consumers feel inflation directly in their day-to-day lives and expenses, so to them, higher prices become the most immediate and tangible threat.
“It’s emotionally charged, and we’ve been living through it for almost four years now,” he said. “Unfortunately, research shows that most people underestimate how long they’ll live, which makes inflation feel like the dominant, immediate worry rather than a long-term planning issue.”
What Advisors See as the Real Retirement Risks
The disconnect between what consumers and advisors see as the biggest risks could be because while consumers are focused on immediate issues, advisors are trained to look at a long-term retirement horizon for their clients — one that could last 20, 30 or more years. For them, outliving savings and market volatility are top of mind.
“Though inflation is a concern, from their perspective, the biggest threats are the various risks that can cause a retirement plan to fail over decades, starting with the potential for clients to outlive their savings,” Bamji said. “In other words, they see longevity and market risk as the factors that truly magnify financial strain over time.”
In short, consumers are right about what feels most threatening now, but advisors are right about what most often derails a long-term retirement plan. The real answer is to address both — protecting purchasing power while managing longevity and market risks is what ultimately enables a successful retirement.
How To Protect Your Retirement From Both Risks
An ideal retirement plan accounts for both consumers’ and advisors’ top risks, so it’s important to take inflation into account.
“Any good retirement plan should assume expenses to rise each year and build those increases directly into your income projections, investment approach and annual withdrawal strategy,” Bamji said.
He said that this could involve one or more of these approaches:
- Inflating your annual spending needs, typically by 2%-3%
- Increasing or decreasing withdrawals based on actual inflation
- Relying on inflation-adjusted guaranteed income sources, such as Social Security and annuities that offer a cost-of-living adjustment option
Outliving retirement savings is also a legitimate risk, but there are ways to prevent this from happening.
“The solution most often involves balancing income, spending, managing risk and, most importantly, making sure you have enough protected lifetime income to at least cover your basic expenses,” Bamji said. “Since Social Security only covers an average of 40% of pre-retirement income, the only other source of lifetime income that can help cover those essential expenses in retirement is an annuity.”
More From GOBankingRates
