There’s no question inflation affects your retirement plans. With year-over-year prices rising more than 9%, you are quite correct in wondering what you can do about it. What can you do to protect your retirement from inflation?
Financial professionals from across the country looked at the most asked questions. Their answers revealed three easy steps you can (and should) immediately start if you’re concerned with rising prices.
What’s the easiest way to lessen the impact of inflation?
Step 1: Revamp your retirement budget
As you ponder the impact inflation will have on your retirement, wouldn’t it be nice if there was a strategy you could employ with ease? In fact, it’s the first step you should take, and all the data is at your fingertips.
“You can start with creating a budget including fixed expenses: those basic needs that must be met such as food, clothing, shelter, medical expenses, transportation, and the internet,” says Jody D’Agostini, a financial advisor at Equitable in Morristown, New Jersey. “Discretionary expenses, or those expenses that are wants versus needs, are where you can begin to sharpen the pencil and control spending until the inflation number comes back in check.”
The purpose of this first step is to allow you to find where you’re most financially vulnerable. This analysis will point you in the right direction to mitigate inflation’s effect on your retirement.
“If these increased expenses stress your financial plan, examine each budget item for the opportunity to reduce costs,” says Emily C. Rassam, Senior Financial Planner at Archer Investment Management in Charlotte, North Carolina. “Now is a great time to reevaluate your spending plan. Write down each monthly reoccurring expense and look for opportunities to reduce or eliminate the bill. Have you evaluated cell phone, internet, and TV carriers? It may be time to renegotiate your package or switch carriers to reduce expenses. We live in a subscription society. Have you subscribed to a newspaper, magazine, application on your phone or service that you can eliminate?”
More broadly, you want to prepare yourself to take action well in advance of the need to take action. Your finances might not yet be strained by inflation, but readying yourself now will prevent you from making a disastrous knee-jerk decision when the time comes.
“Develop a plan and avoid emotional reactions,” says Brian Walsh, Senior Manager of Financial Planning at SoFi in Grand Rapids, Michigan. “When you turn on the news or read the newspaper, it may seem like the sky is falling. Sure, the economy is facing plenty of challenges with high inflation, rising rates and slowing growth. At the same time, it is important to understand your spending, income and assets to develop a plan that is unique to your situation. Start by reviewing your expenses to understand where your money is going and assess whether it is optional or necessary. Next, review your income sources and understand the shortfall that you will need to cover by tapping into your investments. Finally, see if you need to make any adjustments to your plan based on if your investments will be able to cover that shortfall every year. You might not need to make any adjustments, or you might need to pull back on discretionary spending.”
How are seniors coping with inflation?
Step 2: Spend less on purpose
You have two options should you find yourself needing to balance your personal budget. You can either increase your income or you can reduce your spending. You may find the latter easier to do if you’re dealing with expenses that aren’t fixed.
“Retirees can look to reduce consumption in discretionary spending in areas where inflation has been especially excessive such as gasoline and travel,” says Jim Colavita, Managing Director at GenTrust in New York City.
Similarly, when your income is fixed, you may have little choice but to cut spending. This is why you need to do Step 1 (“Revamp your budget”) first.
“Many retirees do not have the option of simply spending more,” says Jeff Coons, Chief Risk Officer at High Probability Advisors in Pittsford, New York. “It is therefore important for retirees to be aware of both the flexibility and inflexibility in their budget. “When inflation hits the necessities of life, like food and fuel, you should look to the areas of spending that are more discretionary and flexible. Spending more than your budget allows can start eating away at the funds you need later in retirement, so do the best you can to squeeze your spending down now to match your budget before the inflation hits.”
Another way to look at this is to frame your spending habits in the same way you did before you retired.
“Just as it is wise to live beneath your means in the working/accumulating years, it is also wise to plan to retire while living beneath your means as well,” says William A. Stack, Owner of Stack Financial Services LLC in Salem, Missouri. “In that way, inflation results have a less immediate impact on lifestyle issues and provide the retiree time to make other adjustments to portfolio/lifestyle depending on the inflation outlook moving forward.”
One of the more popular methods of cutting costs is to find substitutes. For example, margarine vs. butter, pens vs. pencils and driving vs. flying. All these things serve the same purpose. They’re slightly different, but maybe not significantly so. And one may be less expensive than the other.
“You can also be more attentive to sales and choose lower-cost alternatives,” says D’Agostini. “It is important to control costs where you can and be more intentional about what you are buying. Going to the store with a list is a good start to be sure there is less impulse buying. The easiest way to make it through this inflationary period is to control your spending. Try to put off trips or take a more local and less costly option. Delay large purchases if you can until prices come back to normal. Try to choose less expensive options whenever you can: think of substituting beef for chicken, etc. One survey found that retirees, rather than spending less in retirement, are spending more, up to 120% of their preretirement budget. This is “lifestyle” creep that, when acknowledged, can be managed. Now that you have more time, there is an inclination to fill it up with more travel, shopping, entertainment, etc. Be intentional and create a budget for all these costs that works for you.”
Cutting spending isn’t a “one-and-done” strategy. It’s iterative. Once you initially shave down your budget, revisit it to see if there’s more flexibility in it than you saw during your first go-around.
“Once you have trimmed your fixed bills, review your variable spending,” says Rassam. “Look at the average you have spent on each category over the past three months: groceries, dining out, transportation, clothing, household goods, gifts, travel, personal care, entertainment and home maintenance. Are there any categories that shock you? Do you have the ability to reevaluate your spending or find creative ways to make adjustments? In our household, staying off Amazon
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Finally, there’s the traditional granddaddy of them all. It’s the ultimate cost-cutting option many retirees choose. It involves leaving the family home and finding one more suitable for your remaining years.
“Downsizing is an option, but it is easier said than done,” says Doug “Buddy” Amis, President of Cardinal Retirement Planning, Inc. in Durham, North Carolina. “With higher real estate prices in cities and less expensive properties still available in the suburbs and less urban areas, some retirees can relocate to a smaller home and save on utilities and property taxes.”
How does inflation affect retirement investments?
Step 3: Risk more on investments
In this step, you want to assess your investments to see how they match up to inflation. This might require you to change what you’ve been accustomed to believing retirement means to your stock and bond holdings.
“Develop a long-term investment strategy for the sustainability of your portfolio,” says Urban Adams, Investment Advisor at Dynamic Wealth Advisors in Phoenix. “Put another way, have a risk-appropriate amount of equities in your portfolio. Long-term equity returns can be a good hedge against the gradual erosion of spending power caused by inflation.”
Here’s the trap many retirees fall into, even without inflation: They think they no longer need a significant growth (or “risk”) component in their investments.
“Unfortunately, there is not a lot one can do without taking on risk,” says Lyle Himebaugh, Partner at GGA Retirement in Stamford, Connecticut. “One way is to buy dividend paying stocks, income is generated and over time quality stocks should do better than inflation.”
In fact, because inflation has been so tame the past couple of decades, many have become complacent regarding matching their retirement portfolio with the appropriate inflation risk. They’ve overweighted more conservative investments at the expense of growth.
“A common strategy over the last 30 years while interest rates have been falling is to weight more and more of your investment portfolio towards bonds as you get closer to retirement age,” says Matthew Benson, Owner of Sonmore Financial in Phoenix. “That mostly worked well when interest rates were higher and a bond yield could get you between 5% and 7% annually, but the environment that we are in today has yields in about the 2% to 4% range, just keeping pace with inflation. The objective of moving funds towards bonds should still be the same: to de-risk your portfolio. However, if you’re trying to better hedge against inflation, you might have to increase the risk profile to get some of the same returns that you would have gotten with a more bond-heavy portfolio in the past.”
Are you conditioned to believe retirement means less risky investments? If so, inflation will likely get the better of you. For some, this is a critical mindset to overcome.
“It is important for retirees to consider their income streams and whether there is an opportunity to diversify them,” says D’Agostini. “During inflationary times such as these, where markets have been so volatile, the inclination is to seek more conservative investment opportunities. With high inflation, that is not always a wise decision as conservative investments over time will not keep pace with this challenging inflation. The best alternative is to commit a portion of your portfolio to equities where returns over time have eclipsed this inflationary number. Equities have proven to be the best investment vehicle over time to hedge inflation.”
What you’re trying to do is to match the projected inflation rate to assets that promise a return equal to or greater than that rate.
“Despite a volatile stock market, retirees, by necessity, need to have equities and real estate as a part of their retirement income investment portfolio,” says John Shrewsbury, Co-Owner/Advisor at GenWealth Financial Advisors in Little Rock, Arkansas. “Stocks and real estate are two of the few assets that have historically kept pace with inflation. Retirees with fixed pensions (most private sector pensions don’t adjust for inflation) need to supplement pension and social security income with resources from their IRA/401(k) or other investments.”
Another way to approach this is via the “assigned asset” method of organizing your investments. Here, you earmark certain investments to specific goals and objectives.
“You might want to consider segmenting your retirement income into buckets,” says D’Agostini. “The short-term bucket should be cash and conservative instruments that can last for 1-2 years. This generally allows you to weather market downturns that are inevitable in a 30-year retirement. The middle bucket could have more equities in it but still be more moderate in risk. The longer-term bucket could have more equities in it, which fuels the long-term needs through a 30-year retirement. The longer-term buckets can continue to replenish the other buckets.”
There you have it. Three easy-to-implement steps you can take right now to combat inflation. It’s important to do this now before you have to make hard decisions.
“There are a variety of strategies to ‘recession proof’ a retirement such as don’t lock in losses by panic selling investments and assets—and then missing out on the upswing when the economy recovers and values increase again,” says Chris Orestis, President of Retirement Genius in Portland, Maine. “You should not allow yourself to become overly pessimistic about the future and make mistakes by overreacting and making panic-induced mistakes today. Stay calm and use this time to evaluate how you are spending money to find wasteful spending that can be eliminated and re-set your monthly budget. Look for senior discounts that can help retirees save a lot of money every month on things like groceries, retail shopping, entertainment and travel. Work to stay out of and/or eliminate debt because as interest rates are going up so are the rates on debt from things like credit cards making that debt even more expensive.”
Yes, this requires a bit of discipline. You may need help with this (and you’re more likely to need this help as you move through the years, so don’t be afraid to ask).
Before you get to that point, however, you’re in the best position to share your experience. How have you cut costs or otherwise changed your spending habits as a result of inflation? Leave your answer as a comment below because others may find it helpful.