Inflation is a retirement risk factor seniors can't easily shake. That's because some degree of inflation is normal over time. In fact, the Federal Reserve actually supports 2% inflation in the long run and feels that this particular level lends to ongoing economic stability.
Still, in recent years, sticky inflation has been taking a toll on older Americans (and younger ones, too). In a 2024 Allianz Life study, 63% of Americans said they worry more about running out of money than dying. And recent inflation has only heightened that fear.
A separate 2024 survey by Schroders found that among retired Americans, the top concern was inflation eroding the value of their assets, beating out their fear of rising healthcare costs and a stock market downturn.
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Inflation-related concerns have intensified in recent years due to the higher-than-average prices U.S. consumers have experienced in the wake of the pandemic. Generous stimulus policies put extra spending money in Americans’ pockets and fueled a much-needed economic recovery. But that sudden uptick in spending drove living costs upward across the board.
Thankfully, inflation has been cooling gradually since the Consumer Price Index (CPI) peaked at 9.1% in June of 2022. But it’s remained stubbornly high, which is undoubtedly putting many seniors in a tough financial spot today.
Inflation seems stuck in a holding pattern
In late 2024, the Federal Reserve began lowering its benchmark interest rate in response to cooling inflation. Its last rate cut arrived in December 2024, during which time it noted that inflation had made progress toward its 2% target but remained somewhat elevated.
But the Fed opted to pause its rate cuts in January, citing sticky inflation. And in light of new inflation data, a rate cut is also looking unlikely at the Fed’s next meeting in March.
In January, the CPI rose 3% on an annual basis and 0.5% on a monthly basis. Unfortunately, increases in a few key categories are likely to hurt retirees in particular.
In January, food costs were up 2.5% annually, as were energy services. Shelter costs were up 4.4% year over year, and transportation services rose 8%.
Perhaps most notably for retirees, the cost of health care services rose 2.7% from the January prior. Medical care tends to be a major expense for older Americans due to a combination of factors, including Medicare limitations and the fact that medical problems tend to arise with age.
The University of Michigan’s most recent National Poll on Healthy Aging found that among adults 50 and over, the general cost of medical care was a top concern. In 2024, CDC data found that older Americans are skipping medication doses or delaying prescription refills due to an inability to afford the costs.
Healthcare cost increases typically outpace the broad economy. But given that this is such a notable expense for retirees, it stands to reason that the aforementioned 2.7% increase will hurt seniors in 2025.
That said, thanks to the Inflation Reduction Act, Medicare Part D enrollees will have a $2,000 cap on out-of-pocket prescription drug spending, so that may help seniors with larger-than-average expenses.
Social Security's COLA isn't keeping up
Social Security benefits are eligible for an automatic cost-of-living adjustment (COLA) each year. COLAs are tied to inflation and are supposed to help older Americans maintain their buying power as living costs rise.
At the start of the year, Social Security recipients got a 2.5% COLA, which was calculated based on third-quarter inflation data in 2024. Unfortunately, though, the most recent CPI reading shows that that 2.5% increase is already lagging behind inflation.
Of course, that’s not surprising. Because COLAs aren’t predictive, but are rather based on past data, seniors often end up with COLAs that trail inflation. But the broader issue is that retirees on Social Security have been losing buying power for years. Social Security benefits lost about 20% of their buying power between 2010 and 2024, according to the non-partisan Senior Citizens League.
Coping with inflation
Frustratingly high inflation may be with us for the remainder of 2025, particularly as President Donald Trump's tariff policies are just beginning to be implemented. And that could be particularly painful for seniors on a fixed income.
If inflation has been wreaking havoc on your budget this year, you may want to find a financial adviser specializing in retirement planning and reassess your portfolio. A shift toward more income-producing assets like dividend stocks could be appropriate, depending on your risk tolerance and broad investment mix.
Another option may be to pursue part-time work or side hustles for extra income. Social Security recipients may work while collecting benefits, but be very careful. You'll be subject to an earnings test if you haven’t yet reached your full retirement age.
If the idea of a more traditional part-time job isn’t appealing, you can look to the gig economy instead. Gig work, by nature, tends to be flexible, and you may even find that you can monetize a hobby.
Even if you end up having to take a more traditional part-time job, there can be benefits to doing so on top of the extra money. Work can be a means of socializing, and a part-time role can add structure to your calendar and avoid the high cost of loneliness. So, while your primary motivator may be to get a leg up on rising living costs, you may find that working fulfills additional needs you didn’t realize you had.
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