Skip To Content

Inflation — one of retirement’s biggest risks — is back

Four strategies that could help you counter its effects as you head into and through retirement


WE’VE ALL SEEN THE HEADLINES — in 2022 inflation rose to its highest level since the early 1980s. After topping 9% in June, the Consumer Price Index (CPI) measured the increase in the average cost of goods and services at 7.7% for the 12-month period ending October 2022.1 That number can come as a bit of a shock for folks used to a decade of inflation mostly below 2.5%.2


Whether or not the 2022 spike in inflation — which has been driven largely by pandemic-related factors and supply chain disruptions — is temporary, as some economists expect, “it’s a useful reminder of the importance of factoring inflation’s effects into your retirement planning,” says Lauren Galvin, director, Personal Retirement National Sales Manager.

Graph titled “How inflation can deflate buying power.” With dek, “See how even 2-2.5% inflation – the Fed’s target range – could affect the purchasing power of $1 million for retirees between age 60 and 85.” The legend shows that the blue line represents 2% inflation and the red line represents 2.5% inflation. The y-axis shows values from bottom to top: “$500K,” “$600K,” “$700K,” “$800K,” “$900K” and “$1MM.” The x-axis shows “Age 60” on the part of the axis closest to the origin (0,0), while it shows “Age 85” on the far right side of the axis. The red line has a value of “$531,026” and the blue line has a value of “$603,465.” Both lines meet at the coordinates “0, $1MM” where the 0 represents x and “$1MM” represents y, although the red line is steeper than the blue line to represent a greater decrease in buying power. Below the red line is a 100 dollar bill that fills up the empty space below the line on the graph and cuts off around Benjamin Franklin’s eyes. In the space between both lines is also the 100 dollar bill, but with higher opacity to signify the difference between how the two inflation rates affect the purchasing power of $1 million for retirees between 60 and 85.

Source: Calculated using compound interest calculator.

The risk to retirees

Most people notice inflation when they shop: Things cost more, from clothes, gas and groceries to appliances, cars and even homes. If you’re working, you can budget for that — and your salary might also rise with inflation. But for retirees and those nearing retirement, inflation has more serious financial consequences: Over time, rising prices can significantly reduce your spending power when you’re living on a fixed income. For instance, if the current 7.7% inflation rate persisted for five years (experts don’t expect that it will), it would whittle the buying power of a $1 million cash account down to $679,607.05. But even a hike as small as 2% or 2.5% in inflation can have a sizable impact. See above chart.


Retirees received a 5.9% cost-of-living adjustment (COLA) to their Social Security benefits in 20223 — the largest increase in 40 years — to help them cope. However, it’s unlikely that will offset all rising costs.4 The price of healthcare, for example, typically increases even faster than the CPI, and you’re likely to see rises over time in Medicare premiums and deductibles as well. So it’s not surprising that 87% of workers with retirement plans now say they’re worried about the impact of inflation, according to one recent survey.5


Plan ahead to offset inflation

“We need to be financially prepared for 100-year lives,” says Galvin. “When you consider how long your retirement is likely to last, having a plan to help you deal with inflation’s effects is a must.” If you’re retired or nearing retirement, here are four approaches you can discuss with your advisor.


Lauren Galvin headshot
“We need to be financially prepared for 100-year lives. When you consider how long your retirement is likely to last, having a plan to help you deal with inflation’s effects is a must.”

— Lauren Galvin, director, Personal Retirement National Sales Manager

Delay claiming Social Security benefits. While you can begin collecting Social Security at age 62, waiting until age 70 could, by comparison, give you lifetime monthly benefits that are about 77% higher.6 This is one way to hedge against the potential for inflation, but it’s not a one-size-fits-all strategy. Considerations like your health and expected longevity, the age difference between you and your spouse, how much longer you may want to work, other sources of income and tax issues might all play a role in helping you determine the best approach, Galvin says. Your advisor can help you run the numbers and create a Social Security claiming strategy that works for you.


Invest for growth and rebalance regularly. “In response to higher inflation and interest rate increases by the Federal Reserve, bond yields have become attractive again,” suggests Joe Curtin, head of CIO Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank. “While equities may offer an opportunity for the growth of your assets to exceed the inflation rate over the long term, bond yields have become more attractive and warrant a higher allocation in diversified portfolios.” (The yield curve steepens when the difference between short-term and long-term rates increases.) You may also want to consider more conservative investments that aim to counter the effects of inflation on your savings, such as Treasury Inflation-Protected Securities (TIPS) or Series I savings bonds.


“We think inflation will run higher for longer, and that is not always a bad thing,” says Curtin. But it makes rebalancing your portfolio periodically more important than ever. Doing so allows you to maintain the proper mix of asset classes that match your objectives, time horizon, liquidity needs and risk tolerance. “We encourage clients to continue to rebalance their portfolios as yields continue to normalize and we expect the yield curve to steepen in coming quarters as we move through the recent market volatility,” he adds.


 Joe Curtin headshot
“In response to higher inflation and interest rate increases by the Federal Reserve, bond yields have become attractive again.”

— Joe Curtin, head of CIO Portfolio Management, Chief Investment Office, Merrill and Bank of America Private Bank

Consider the role of annuities. These contracts — long-term investments designed for retirement purposes, typically issued by insurance companies — can be indispensable in your retirement toolbox, says Galvin. When you invest a portion of your retirement assets in an annuity, you are provided with a consistent stream of fixed income for life or for a period of time specified in the contract. “In combination with Social Security, that guaranteed income might give you the confidence to pursue a slightly more growth-oriented investing approach with your remaining assets,” Galvin notes. Your advisor can help you understand the various types of annuities and what they can offer, as well as their risks. “Annuities are only one part of a larger set of asset allocations that might also include cash, equities, fixed income and, for qualified investors, alternative investments such as precious metals, real estate or commodities,” she adds.


Prepare for future long-term care costs. “If you look at the arc of human history, in spite of diseases, we have steadily increased longevity over the long term,” says Galvin. “We need to be prepared for the costs associated with it.” In retirement, a 65-year-old couple with median drug expenses is likely to need $296,000 to cover their out-of-pocket healthcare costs.7 And considering that increases in the cost of healthcare tend to outpace inflation, planning ahead is key.


One strategy to help offset rising healthcare costs is to contribute the most you can to a health savings account (HSA) — but be aware that in order to open an HSA, you must be enrolled in a high-deductible health insurance plan. You can keep the account after you sign up for Medicare Part A, but you can no longer make contributions. HSAs let you carry over funds year to year and offer the triple benefit of pre-tax contributions, tax-free growth and tax-free withdrawals for qualified expenses. Eligible expenses include Medicare premiums, as well as long-term care premiums and services. (Please consult with your attorney or tax advisor to understand the tax and legal consequences of establishing and maintaining an HSA account.)


Another option to consider is a life insurance policy with a long-term care benefit rider, which could potentially cover some healthcare costs while also providing a death benefit to your beneficiaries.


Inflation isn’t something we can control, says Galvin. “But there are concrete steps we can take to lessen its impact on our retirement security.” Discussing each of these strategies with your financial advisor and legal and tax professionals can help ensure that you’ll be able to afford the life you want in retirement, even when inflation boosts your cost of living.

New to Merrill? Connect with a Merrill Advisor

Would you like us to contact you?

By providing your contact information above, you agree that a representative of Merrill, the Brokerage affiliate of Bank of America Corporation, may contact you via telephone and/or email to discuss and/or offer investment products and services that may be appropriate for you. You agree that you are providing to us your consent for us to contact you regardless of any Do Not Call or Do Not Email privacy choices you may have previously expressed until you revoke this consent, or up to 90 days. You may revoke your consent at any time by notifying the Merrill representative.

1“Consumer Price Index — October 2022,” U.S. Bureau of Labor Statistics, November 10, 2022 

2”CPI for All Urban Consumers, “U.S. Bureau of Labor Statistics, September 21, 2022

3“Social Security Announces a 5.9% Benefit Increase for 2022,” Social Security Administration, October 13, 2021 

4“Social Security recipients get 5.9% increase, but rising prices will offset the boost,” CNN, October 13, 2021

5“The 2022 BlackRock Read on Retirement,” BlackRock, 2022 

6“When to Start Receiving Retirement Benefits,” Social Security Administration, January 2022 

7Employee Benefits Research Institute, January 2022 


Important Disclosures


Opinions are as of 11/16/22 and are subject to change.


This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.


The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).


Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.


“Bank of America” is a marketing name for the Retirement Services business of Bank of America Corporation ("BofA Corp.").


An annuity is a contractual agreement where a client makes payments to an insurance company, which, in turn, agrees to pay out an income stream or a lump sum amount at a later date. Annuities typically offer (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity payout options that can provide guaranteed income for life. The fees and charges associated with annuities may include, but are not limited to mortality and expense risk charges, administrative and distribution fees, as well as charges for the underlying investment options and optional benefits. Early withdrawals may be subject to surrender charges, and taxed as ordinary income, and in addition, if taken prior to age 59½ an additional 10% federal tax may apply.


All annuity contract and rider guarantees, including optional benefits or annuity payout rates and all guarantees and benefits of an insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill or its affiliates, nor does Merrill or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.


Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.


Alternative investments are speculative and involve a high degree of risk.


Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.


You need to answer some questions first

Then we can provide you with relevant answers.

Get started