How worried are you about retirement inflation? You probably have a positive outlook about retiring comfortably if you’re in the majority of Americans.
Those are the results of the 32nd annual Retirement Confidence Survey conducted by the Employee Benefit Research Institute and Greenwald Research in January, polling 2,677 workers and retirees.
“Even with the concerns of the pandemic and rising prices, overall, American workers and retirees still feel positive about their retirements,” said Craig Copeland, director of wealth benefits research at EBRI.
Results of the 2022 survey are nearly unchanged from the 2021 survey, with nearly 7 out of 10 workers reporting they are “somewhat confident” about retirement savings — with nearly one-third reporting they are “very confident.”
According to the survey, about 8 out of 10 retirees believe they can survive their golden years comfortably. However, the pandemic dampened optimism for a third of workers and a quarter of retirees.
“The Americans who are more likely to feel that their futures appear grim since the pandemic are those who were already pessimistic about their futures, due to lower incomes, problems with debt or lower health status,” said Copeland.
It’s not surprising that inflation and rising expenses are workers’ and retirees’ top concerns when it comes to retiring. In fact, according to recent Fidelity data, 71% of Americans are concerned about inflation impacting their retirement readiness. And, for good reason.
Why Inflation Has You Worried About Retirement
From food to housing, everything is becoming more expensive. A measure of price increases, the Consumer Price Index, rose 8.3% from a year earlier in April 2022.
In addition to the findings from Fidelity, Pew Research reports that 70% of Americans see inflation as “a very big problem” for the country.
“Meanwhile, some older adults are choosing to put off retiring,” writes Michelle Fox for CNBC. “Thirteen percent of Gen Xers and baby boomers said they’ve postponed or considered delaying plans to leave the workforce because of rising costs, a survey from the Nationwide Retirement Institute found.”
An unstable stock market could also make those saving for retirement rethink their investment strategies. In addition, higher inflation could erode the value of Social Security checks, pension payments, and 401(k) savings.
It’s no secret that even in normal times, retirees who are preparing for retirement or who have already retired are concerned about running out of money. Inflation only amplifies those concerns. Regardless of how well people plan, inflation is an uncontrollable variable that makes retirement planning difficult.
Quite simply, inflation is the nemesis of fixed incomes. But, there are ways to protect your retirement savings from inflations.
How to Fight Back Against Inflation and Make Your Money Last in Retirement
Adjust for inflation.
Those with steady wages might not feel the effect of inflation when they’re working, notes Cameron Huddleston for GoBanking Rates. As such, inflation might not affect your retirement savings plan.
“On average in the USA, we see that the prices of goods and services rise by 3% per year,” said Michael Hardy, a certified financial planner and vice president at Mollot & Hardy in Amherst, New York. “This means that over a 20-year time period, your $100,000 of retirement savings will likely be worth 60% less in terms of buying power 60% less.”
For those who failed to factor inflation into their retirement calculations, they may need to spend more than they estimated “I find that most people fail to account for this change and it ends up costing them dearly years later,” Harday said.
Along with saving more to prepare for inflation, delaying your Social Security benefits may also be an option. When you wait until 70 to claim Social Security, you can maximize your benefits. The Social Security Administration’s cost-of-living adjustment, which is an inflation-adjustment for benefits, will also be applied to your bigger monthly check. “Now a greater proportion of your income will be inflation-adjusted,” said Dave Littell, professor emeritus of taxation at The American College.
Keep calm and invest on.
The level of inflation is the highest since the 1980s. Higher inflation rates could quickly drop or be a longer term problem.Higher inflation rates could quickly drop or be a longer term problem.
“Retirees are in a tough spot,” Darrell Pacheco, a certified financial planner in Charlottesville, Va., who runs a business helping employees make better financial decisions, told NPR. According to him, people are scared by all the attention paid to inflation.
“And when it comes to folks and their money, we know that high anxiety usually tends to lead us to make bad decisions,” he says. For example, panicking and dumping stocks.
“Your best hedge against inflation is to remain invested,” Pacheco says. “Period.”
Why? Compared to bonds, stocks have a much higher rate of return over time. Although U.S. stocks have fallen some lately, they’re still up over 10% from a year ago and a lot more since then.
When it comes to retirement savings and investments, Pacheco says, “stick with your plan.”
Are you unsure of whether you invested properly? Investing should consist of a broad mix of investments appropriate for each individual’s age, says Pacheco. Investing in target date funds is one way to make that happen. Investing in target date funds is one way to make that happen. As you age, these may become less risky and can have low fees.
“Target date funds are incredible vehicles … one of the best vehicles ever created,” Pacheco explains. “For many investors, that actually is a great all-in-one option.”
Other investment options? Treasury inflation-protected securities. They’ll keep up with inflation. You can also hedge against inflation with real estate, commodities, and precious metals.
Adopt a sustainable withdrawal rate mentality.
In retirement, the sustainable withdrawal rate reflects the estimated percent of savings that you can withdraw annually without running out of money, explains Fidelity.
By looking at history and simulating multiple outcomes, the experts at Fidelity came to the following conclusion. Ideally, you should withdraw no more than 4% to 5% of your savings in the first year of retirement, and then adjust the amount every year for inflation. This should help to ensure that you are able to cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time).
It’s possible for your situation to differ. If you plan to travel extensively in retirement, you might withdraw more when you are young, and less when you are older. In addition, there are factors outside of your control, such as how long you live, inflation, and the long-term return on markets. However, this 4%-to-5% range can serve as a handy guideline when planning.
Here’s a hypothetical example. A 67-year-old man retires with $500,000 in retirement funds. Each year, he withdraws 4%, or $20,000. As he plans to withdraw an equivalent amount of inflation-adjusted savings over the remainder of his retirement, this $20,000 sets his baseline. His annual increase is based on inflation–regardless of how the market performs or what his investments are worth.
Don’t keep too much cash on hand.
For everyday expenses, emergencies, and large purchases, we all need cash on hand. Cash, however, might not be the best long-term investment, especially when inflation is skyhigh. With each passing year, inflation reduces the amount of goods and services you can buy with your money.
Consider investing some of the extra cash you have in long-term investments that will ensure your buying power over the long run. A good rule of thumb is to keep 3 to 6 months’ worth of expenses in an emergency fund. However, if you have more saved up, you’re probably better off investing it in something like Series I savings bonds.
The U.S. government sells and backs I bonds, which have never defaulted. It is impossible to lose money on I bonds unless the government collapses.
In addition, Series I bonds keep up with inflation. For example, in November 2021, the Treasury announced an astounding 7.12% interest rate through April 2022. These investments have never shown such high rates for this period. To put that in perspective, almost all high-yield savings accounts and certificates of deposit pay less than 1.5% annual interest.
The problem? We don’t know if I bonds will continue to pay 7% after April. After all, every six months, interest rates are adjusted for inflation. As a result, they may rise or fall.
Aim to get out of debt.
Inflation in real estate taxes is a major concern for many investors. However, it should actually be rising debt loads. An unprecedented number of older Americans still owe money on their mortgages, credit cards, and even student loans. The Government Accountability Office found that the proportion of older households with debt increased from 58 percent in 1989 to 71 percent in 2016.
There was also a substantial increase in the median amount of debt for older households with debt in 2016 ($55,300 in real 2016 dollars) compared with 1989 ($18,900). As a result, the share of older households with a credit card, mortgage, and student loan debt was significantly higher in 2016 compared with 1989.
When inflation rises, this debt will become even more of a financial burden. Also, if it’s adjustable-rate debt, such as a mortgage, that isn’t on a fixed rate-any inflation could be devastating. As such, anyone who is worried about late-life inflation should pay off their debt as soon as possible.
Some suggestions include;
- You can pay off your loan faster if you make extra payments consistently. For instance, paying more than the minimum payment due or making multiple payments a month.
- Paying off your most expensive debt first. If you do so, you reduce the amount of interest you pay, and your total debt decreases.
- Alternatively, consider the snowball method. If you start with the smallest balance, you’re going to pay that off first, then roll the payment onto your next smallest balance, etc.
- You may be able to pay off your debt more quickly by refinancing to a shorter term.
- You may be able to repay debt faster if you consolidate high-interest rate loans or credit card balances into one loan with lower interest rates.
Consider healthcare costs.
“Medical care is one of those things that doesn’t really seem to go on sale – ever see a 2-for-1 offer on X-rays?” asks the Marcus by Goldman Sachs team. As we age, health care costs become a more important expense to consider when it comes to retirement, since the more money we spend on health care, the more we cost.
Aside from taking up more of our budgets, medical costs generally tend to increase. According to Health Affairs, a peer-reviewed health policy journal, health costs will increase by 4.1% on average between 2021 and 2023, not just for older Americans. This doesn’t even account for inflation.
It may be possible to mitigate the impact health care has on your retirement funds with a little planning.
Contrary to investing, where you aim to maximize returns, health care strategies are more about finding ways to save money outright (for example, by opening a health savings account) or getting help with paying for health care, like Medicare.
The following are some considerations:
If you have an HSA, maximize your contributions.
You can use a Health Savings Account to set aside money for health care expenses in retirement, though it is not an inflation hedge. Withdrawals from HSAs are tax-free as long as they’re used for approved medical expenses. For singles with a high-deductible health plan in 2021, you can contribute $3,600 ($3,650 in 2022); for families, $7,200 ($7,300 in 2022).
Stay on top of Medicare.
You can enroll in Medicare after you turn 65. The plan can be combined with other medical insurance. If you wait to enroll, you may have to pay higher premiums.
Before you retire, consider long-term care insurance (or an alternative).
There’s no direct way to stop inflation. However, it can help stretch your hard-earned dollars. A long-term health insurance policy covers care for the elderly, like adult day care or assisted living facilities.
Take advantage of annuity-based products.
“One of the biggest misconceptions many people have is that retirement simply means living off of their pension, Social Security, or retirement savings,” states Pierre Raymond, a 25-year veteran of the Financial Services industry. “While this may be the case for a minority of people, the latter reveals that some Americans have still not placed any stress on their financial future when they reach the age of retirement.”
In order to make things easier, some retirees may invest in various stocks and portfolios or consider taking out annuities that will provide them with monthly payments throughout their entire lives.
It isn’t as farfetched as it was a few years ago to find investment and savings products. “Companies and platforms such as Due have changed the game completely, making it easier, and more secure for any person to invest in their retirement,” adds Raymond.
With Due, individuals can decide how much money they’re willing to invest (as it requires a lump sum and monthly payments), what their monthly installment will be, and the better you plan, the higher your monthly payout will be.
“While annuities may have not been very popular over the last few years, baby boomers, and now millennials are understanding how they can grow their wealth with the help of annuity products,” he says.
Put off major purchases.
Jay Zigmont, a CFP and founder of Mississippi-based financial firm Live, Learn, Plan, says to put off major purchases now, especially on a new car. “If your car works and gets you to” point A to B,” then stick with it,” he says.
Consumer price index data shows that new car prices inched upward 11.1% last year, even though auto loan rates are low. Over the past year, used cars have seen their inflation rate rise by 31.4%. Zigmont suggests that car prices are getting out of touch with reality, and consumers ought to ask themselves if they truly need a new car.
“Try paying for a complete detailing of your car and it will feel new to you without the sticker shock,” he suggests.
Rather than shopping around for another lease when a car lease is about to expire, financial planner Chris Diodato suggests purchasing the car. According to Diodato, a CFP, and founder of Florida-based WELLth Financial Planning, the initial lease contracts indicate purchase prices far below current resale values.
Keep bringing home the bacon.
How can you conserve your capital? Continue to earn money. In the end, every dollar you earn in retirement is a dollar you won’t need to withdraw.
However, that does not mean you have to stay in the 9-to-5 job you’ve been hoping to quit as soon as possible. Maybe you could get back on your hours and work part-time. If you’re already retired, you could make money as a consultant, freelancer, or join the gig economy. If you have grandkids, you could offer to babysit.
Speak with a professional financial planner.
Having a financial professional by your side can help you prepare a good strategy and test out possible scenarios. They can also help you update your plan on a regular basis to reflect changes to the market and your goals.
Lastly, there isn’t enough serious discussion about changing inflation expectations among financial planners. Take retirement seriously and don’t let complacency creep in. If you want to have a successful retirement, revise your assumptions and get the right guidance.
Frequently Asked Questions
1. What is inflation?
When our money loses its purchasing power, we’re experiencing inflation. Inflation occurs when product and service prices increase.
For example, a gallon of gas now tops $4; last year it cost around $3. In other words, filling your gas tank has been more expensive.
Economies refer to the “inflation rate.” This is the rate at which the cost of various consumer goods increases. We have had an inflation rate of about 3% for the last 20 years. Inflation in the United States was 8.3% for the 12 months ended April 2022, down from 8.5% the previous year, based on Labor Department data published May 11.
2. What causes inflation?
It’s easy to divide inflation into two types: demand-pull inflation and cost-push inflation. These phrases may sound strange to you. But, they reflect experiences that many of us have experienced.
In a cost-push, prices rise when costs go up, like wages or materials. As a result of these higher costs, prices go up, which adds to the cost of living.
Consumers have a resilient interest in a particular service or good, which generates demand-pull inflation.
Various factors may contribute to such a demand, such as a low unemployment rate, a high savings rate, or a high level of consumer confidence. As demand for products increases, companies produce more to keep up, which, in turn, could result in price increases and product shortages.
3. How much money can inflation cost retirees?
It is astonishing how much inflation can cost retirees in terms of actual dollars. Over a period of 20 years, LIMRA Secure Retirement Institute calculated the effect of inflation on the average Social Security benefit. One percent inflation could wipe out $34,406 in retirees’ benefits, according to the research. In the event of a 3% increase in inflation, the shortfall would amount to more than $117,000
4. What can retirees do to mitigate inflation’s impact?
There are ways to minimize the impact of inflation on your retirement, despite the fact that you can’t directly alter it.
A logical start would be to cut costs on housing, for example. The cost of property taxes, utilities, homeowners insurance, and maintenance gets cheaper when you move from a large to a smaller house. And, that’s true even if you’ve paid off your mortgage.
Additionally, you should add investments to your portfolio that are likely to rise in value over time. For instance, a real estate investment trust (REIT). Or, stock in the energy sector. These will likely increase in value along with inflation.
And, it’s better to balance stocks with bonds. The reason is that they tend to have better returns.
5. How worried should I be about inflation?
“First, keep in mind that inflation is why we invest,” writes Doug Ewing for Nationwide. “While you may feel caught off guard by the recent price surge, by investing in the stock market you’ve already been preparing for this very moment.” The annual US inflation rate was 3.25% from 1914 to 2022. From 1926 to 2021, the S&P 500® Index has averaged 10.49% annual returns. “By staying invested over the long term, you haven’t just been keeping up with inflation, you’ve been building wealth.”
You should also know that economists have studied the relationship between inflation and stock market returns for a long time. “While many have concluded that inflation has a net negative impact on the markets, there does not appear to be a clear correlation between inflation and market returns,” adds Ewing. “Historically, periods of high inflation have seen both positive and negative stock market returns.” Many factors affect stock market performance, including inflation.
On top of that, retirement spending often decreases. The fall in spending is so steep that even with inflation people spend less.
As such, if you’ve taken the steps listed above, inflation should not deplete your savings.
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