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Inflation and Retirement 3 Messaging Tips for Plan Sponsors

Inflationary periods can threaten retirees’ purchasing power and rattle retirement savers’ confidence. We’re offering plan sponsors three tips to counter concerns by raising awareness about inflation impacts and delivering insights on inflation-hedging strategies.

Head of Participant Engagement

My father informed me that he paid $2.10 for a single apple from his local grocer this week. Resisting the urge to rib him about walking to the store to buy just one piece of fruit, I asked him how much he usually paid. “About half that,” he replied. I hope it tasted good, Dad. The consumer price index for food increased 9.4% over the 12-month period ending in April 2022 — 0.9% in April 2022 alone.i For those of us who head to the grocery store with more than one item in mind, annual inflation at the current rate of 9.4% would mean that a $100 grocery budget would buy less than half the groceries in 10 years that it does today. That said, consumers are feeling the financial pain when they go to buy anything — from gasoline to clothing to one shiny red apple.

But what implications does high inflation have on retirement savings? It’s less of a concern for young investors given their longer time horizon to begin spending their retirement savings. In fact, a hypothetical portfolio of 90% stocks and 10% bonds has outperformed inflation 100% of the time when looking at rolling 20-year annual periods since 1929.ii But for those nearing or already in retirement, like my dad, current inflation threatens the purchasing power of their hard-earned savings. It’s no surprise then that over half of Americans (57%) are worried inflation will make basic retirement expenses unaffordable.iii

Here are three ways plan sponsors can raise awareness about the impact of inflation and educate participants on inflation-hedging strategies.

1. Put inflation into real life context. Explaining inflation in numbers and percentages might make sense to some people, but it can have more meaning when put into real life context — using simple language and imagery is a bonus. Take our candy bar example:

Figure 1: The Shrinking Effects of Inflation

An annual inflation rate of 2% means that in 30 years the purchasing power of a dollar will shrink by almost half. Higher inflation rates will mean greater value shrinkage.

Shrinking Effects of Inflation

2. Highlight inflation-hedging strategies. Chances are, you likely offer some kind of inflation protection in your DC plan, be it through stand-alone options or your target date glidepath, for instance. It may be helpful for you to highlight these options to participants, especially during times of high inflation. Strategies like TIPS and commodities are often cited as inflation hedges, with real asset funds encompassing these components. Check out our Real Asset Fund video for participants, which explains inflation at a high level, while discussing how real assets help offset the threat of inflation.

3. Encourage younger participants to stay the course — and save early and often. Generally, inflation is a short-term problem that won’t necessarily affect those 30 or 40 years from retirement — especially if they’re using their DC plan as intended, and not as a short-term savings account. However, if inflation continues over the long term, a participant will need to save more in order to keep pace with rising costs of goods and services in the future. The importance of saving is underscored by retirees themselves, 88% of whom surveyed for our 2018 Global Retirement Reality Report said that the top advice they’d give younger savers would be to save early and benefit from compound interest (US-only retiree sample, n=831). To give them a nudge, consider rolling out a savings campaign, like our Financial Fitness Bootcamp, which offers tactical solutions to common concerns, encourages small goal making, and sheds light on other concepts like taxes.

We can’t control the economy or the markets. But we can offer education and highlight solutions for participants feeling the pinch so they might have a better sense for how to manage both their day-to-day and longer-term financial lives. Supporting younger participants with strategies that focus on wealth accumulation may help them to stay on track and provide better outcomes for their retirement. For those approaching or already in retirement, highlighting inflation-hedging options available to them in your DC plan might help them preserve some purchasing power. Ultimately, your participants are looking to you for this guidance — and they’ll appreciate you for it.

Oh, and Dad, if you’re reading this, consider planting an apple tree.

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