Frequently Asked Questions About Inflation and Retirement

Navigating the economic impact of inflation can bring up many questions. Here are simple answers to a few common ones.

Is my pension affected by inflation?

It depends on the type of pension you have. The vast majority of private-sector pensions do not have automatic cost-of-living adjustments. This means the monthly check you receive will be for the same dollar amount for the rest of your life. Over 10 or 20 years, the purchasing power of that fixed payment will be significantly reduced by inflation.

On the other hand, many government pensions, such as those for federal employees, state workers, and military members, do include some form of COLA. To know for sure, you should contact your pension plan administrator directly. They can provide you with the specific details of your plan.

Should I pay off my mortgage faster in retirement?

This is a great question with no single right answer, as it involves both financial and emotional factors. From a purely financial standpoint, a low, fixed-rate mortgage can be a powerful tool during inflationary times. You are paying back the loan over many years with dollars that are becoming less valuable over time. In essence, inflation is helping you pay off your debt.

However, there is a huge emotional benefit to being completely debt-free in retirement. The peace of mind that comes from owning your home outright and having one less major bill each month is invaluable for many people. It also frees up cash flow in your monthly budget. The best choice depends on your interest rate, your other financial goals, and your personal desire for security.

What is the difference between inflation and deflation?

We’ve talked a lot about inflation, which is the general increase in prices and the fall in the purchasing value of money. Deflation is the opposite: it’s a general decrease in prices. While falling prices might sound like a good thing, deflation can be very damaging to an economy. It can lead to lower company profits, job losses, and can make people delay purchases because they expect things to get even cheaper, which can slow down the economy even more. While inflation is the more common concern for retirees, it’s helpful to know what the opposite term means. Inflation is a slow leak in your financial tire; deflation is a more complex and much rarer problem.