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Statistics Say: Inflation Is Leading Millions Down a Path to Disaster. Here’s How to Avoid That, and Set Yourself Up for a Comfortable Retirement.

Inflation has reared its ugly head in recent years, as evidenced by outsized Social Security cost-of-living adjustments (COLAs) of 5.9% in 2021 and a whopping 8.7% in 2022. By definition, that means many things have suddenly cost us a lot more than they used to, and it’s leading to some unpleasant and even dangerous outcomes.

For example, fully 45% of respondents in a survey reported that due to inflation, they were using credit cards to make ends meet. (Among millennials, that figure was a whopping 67%.) Even more alarming, 35% reported having maxed out their credit cards in recent years.

Someone has his hand on his chin, looking upward and worried.

Image source: Getty Images.

Here’s a closer look at inflation, along with some tips on how to avoid ending up in debt due to it.

Inflation 101

Inflation is what you have when prices increase over time. It’s normal for there to be some inflation, and it has often been around 3%, on average. The Federal Reserve has been targeting 2% inflation, and is expecting to start reducing interest rates once our current inflation rate (recently 3.4%) pulls back more.

When inflation is gradual, we don’t notice it much, as we’re generally not surprised by little price increases here and there. But when inflation is significant — for a sustained period — it’s a different story. We suddenly start noticing that many things seem to cost a lot more, and we may also notice that our paychecks are not going as far as they used to. If the situation gets bad enough, we may start taking on debt in order to keep paying our bills.

Inflation can be a retirement wrecker — in multiple ways

Inflation can damage our future financial security in several ways. While we’re still working, it can mean that we have less cash on hand to invest for our retirement. If things have gotten so tight that you’re taking on credit card debt, you are probably not depositing checks into your brokerage accounts, and you may also have cut back on contributions to your retirement accounts. Not saving for retirement can lead to a very shaky future.

Meanwhile, when you’re in retirement, inflation can eat away at the purchasing power of your dollars. Imagine, for example, a retirement that lasts 30 years, with 3% inflation throughout it. If you start that retirement in 2024, $1,000 can buy $1,000 of goods. Flash-forward 30 years to 2054, and $1,000 from your nest egg will be able to buy what would have cost you just $400 in 2024.

That’s a simplified example, of course, and inflation will be high in some years and low in other years, but you can see the striking power of inflation to challenge your future financial security.

What to do about inflation

Fortunately, there are some moves that you can make, especially as you approach retirement, to position yourself for less inflation damage. For example:

Avoid getting into debt — or dig out of it

It’s also key to avoid getting mired in credit card debt — in large part because it’s very costly. The average credit card rate was recently 24.7% — yikes! That survey mentioned above also found that 22% of respondents had between $10,000 and $20,000 in credit card debt, and plenty had more than $30,000. If you owe, say, $20,000 with a 21% interest rate, you’re looking at paying more than $4,000 annually — just for interest. Fail to pay it off on time, and your balance will grow.

Here are some tips for avoiding getting into debt and digging out of debt:

  • Focus on paying for non-negotiable necessities, such as housing, food, transportation, utilities, taxes, and insurance. Identify which expenses are avoidable — and avoid them. (For example, you might mow your own lawn instead of hiring help for that.)
  • If you can’t meet your expenses, look into boosting your income and/or cutting your expenses. Some ideas: Take on a side gig for a short or long while, take in a boarder, shed one household car if you can, ask for a raise, look for higher-paying work, or get qualified for higher-paying work.
  • With debt, aim to pay off your highest interest rate debts first.
  • Consider consolidating debts, if that will help you manage them.
  • Contact your creditors and see if you can negotiate better terms.

Whether your financial life is being stretched thin by inflation or other factors, know that there are steps you can take to alleviate some of the stress and help you get in better financial shape. Doing so can get you to a place where you’re building wealth, not building debt, and that wealth can provide for a comfortable future.

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