Do Retirees Need to Worry About Inflation?
by Trey Finch
There is no denying it anymore. Inflation is everywhere today; in headlines, at your gas pump, and on grocery store price tags.
Retirees especially need to be careful now. All is not lost, but for the time being, things have gotten more complicated.
For instance, when this blog was drafted, Social Security was not keeping up. That is just one of the multiple challenges facing retirees right now. As a result, let’s look at what can help you weather this economic storm.
Retirement Planning: Social Security Inflation
Some people have said for years that Social Security is not going to be around beyond the 2030’s. Others contend that measures will inevitably be made to get it solvent again.
Lacking a window to the future, I am not encouraging anyone to write it off completely. However, I am not encouraging anyone to base 100% of their retirement planning around it, either.
Cost of living adjustments (COLAs) have increased the payout to beneficiaries. The U.S. Social Security Administration announced its intent last October to raise benefits by 5.9%.
Some touted this as the biggest boost to Social Security in 40 years. It comes out to about $92 per month, given an average monthly benefit of $1,543.
Nevertheless, it is not enough. The hard truth is that the price of goods and services is still climbing. Worse still, Medicare Part B premiums deducted from many seniors’ Social Security checks ensure that this COLA amounts to even less.
From 2000 to 2020, Social Security benefits averaged an annual increase of 2.2%. At the same time, Medicare Part B premiums rose an average of 5.9%.
Things could improve, but in the meantime, Social Security should probably be seen as an income supplement and nothing more. It simply cannot keep pace with the ravaging effects of inflation on the economy.
Rising Inflation: What Can Be Done?
I am not out to depress you, but we have to acknowledge these problems before we can intelligently consider potential solutions.
I mentioned Medicare earlier, but that is just the tip of the iceberg. Medical costs in general usually rise at a higher rate than any other expense in the United States.
With this in mind, I have to mention the only thing that may be worse than Social Security falling behind: By raising the cost of living, inflation can also wreak havoc on retirees’ savings.
For example, you could have $100,000 saved in an account paying 1% interest. A year later, you would have $1000.
This sounds nice, right?
However, if inflation is also running at 3%, you will need $3000 to equal the buying power from a year ago. Though you’ve gained funds, your buying power is decreasing.
The more inflation goes up—if your savings aren’t growing at the same rate—the more money you lose. A retiree living on savings will struggle to maintain their previous standard of living when this happens year after year.
Similarly, if you had planned to travel or pursue a hobby that requires regular investment (like the upkeep on a motorcycle), enjoying your retirement will be more expensive. Unless you have significant funding to spare, leisure activities may have to be scaled back.
Readers in their 60’s may recall The Great Inflation of the late 20th Century. This period of rising prices exceeded 14%. Nobody likes topping 8% now (like we did in April of 2022), but today’s inflation is not the worst it has ever gotten.
Inflationary Interim Investing
It can be difficult beginning to establish significant savings for your future retirement without investing. When you are a retiree watching inflation gnaw away at your buying power, the same rule sometimes applies.
Therefore, if you are a retiree, you need to make sure that your savings are invested for more of a return than savings or money market accounts will net you. Granted, this is riskier, but we can find instruments within your tolerance for risk.
For instance, exchange-traded funds (ETFs) may be worth considering. Their returns usually overcome inflation. They often have lower fees than most index funds, too. Especially if individual stocks’ volatility worries you, they might be a preferable alternative.
Treasury Inflation-Protected Securities (TIPS) are an option, as well. Since their interest payout is adjusted in keeping changes to the Consumer Price Index, their principal payment to you gets adjusted, as well.
Should the price of these securities dip, you can still expect the principal you originally paid back (provided you bought the TIPS when it was initially issued).
If you can afford to wait a while, U.S. government I bonds are savings bonds intended to protect their owners’ cash from inflation. As rates rise further, these lower-risk, higher-returning investments find more appeal. However, they take 30 years to mature.
It is essential to have a well-diversified portfolio in times like these. Holding a long position is not necessarily a mistake now, but balance is extra important. Investments like real estate can help diversify your assets while mitigating inflationary pains.
People will always need an apartment, house, et cetera. As a result, real estate’s value sometimes rises against inflationary winds—and has been known to grow above them.
If All Else Fails, Tighten Your Belt
Some retirees are opting to return to the workforce. Obviously, this is not an option for everyone. Nevertheless, if you are physically able and can find a position that doesn’t over-exert you, it can extend your income.
The good news is that if you go back to work to pay into your retirement accounts again, the annual limits have been raised for 2022. That’s an increase of $1000 since from 2021’s limit.
The IRS now allows contributions up to $20,500 to an employer-sponsored 401(k) by all employees. Workers who are 50 years old or above can also add a catch-up contribution of $6,500.
If you prefer to remain retired (which is understandable), downsizing is another option. Some people empty-nest so long that they continue paying to heat and cool far more space than they need for years. The cleaning and maintenance are easier on smaller homes, too.
Believe it or not, all inflation isn’t terrible. Rather than doing away with it entirely, the U.S. government tries to keep it going at 2% each year. This prevents us from toppling into a deflation cycle, which can be far worse than inflationary periods.
Reach out to a Financial Advisor in Brentwood, TN to start inflation-proofing your retirement plans now.
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