How much income does it take to live comfortably in retirement? The answer to this question has remained much the same over the past 10 years, but the recent spike in inflation may have you rethinking the answer.
As I see it, 2021’s burst of inflation is the temporary byproduct of the post-pandemic recovery. I don’t see inflation staying high, but I also don’t foresee it returning to historic lows given major federal spending on social programs and a continuing home shortage. For the next few years, I predict the U.S. will be looking at higher baseline inflation than we have seen in the last 10 years. The Federal Reserve has hinted that it will continue tapering its debt purchases throughout this year.
If you created your financial plan within the last 10 years, a rise in inflation may necessitate reviewing and resetting your strategy and tactics. Retirees will have fewer options than full-time workers to react to changing scenarios; however, there are some modifications nearly everyone can make.
For example, transferring cash to a high yield savings account can help preserve its value. On Bestrates.com you can get .55%, although this still does not keep up with inflation it is better than most traditional banks. It’s best to shop around so you aren’t sacrificing liquidity, especially if the cash is earmarked for emergencies or short-term living expenses.
I’ve cautioned my retired clients about chasing yield in a low interest rate environment. Many of them will be inclined to jump headfirst into bonds as interest rates and yields rise, but in my opinion, the potential returns of bonds and bond funds won’t justify the risk.
I believe dividend-paying stocks offer a more suitable risk/reward profile for income investors. Retirees may want to consider the stocks of larger companies with a solid track record of performance and a history of rising dividends. If rising rates fuel a stock market decline and contribute to volatility, dividends should be able to mitigate both outcomes.
Retirees can use rising dividends to give themselves a raise periodically. It’s a simple tactic that can help offset reductions in purchasing power. The concept of giving yourself a raise may seem novel, but it’s not that different from getting a cost-of-living adjustment in your Social Security benefit. By the way, the 2022 cost-of-living adjustment is predicted to be in the range of 5.5% to 6.2%, which would represent the biggest increase in decades.
Inflation can be a positive force if you own your own home and plan to age in place. If you want to tap your home equity, for example, the property may qualify for a larger HELOC or reverse mortgage. If you were planning retire to another location—such as Utah or Arizona— with less density but good amenities, you may not be so lucky. The price of homes in many of these areas has increased by double digits given new opportunities for remote work.
Whenever the subject turns to inflation, investors wonder if they should buy gold. Gold is often touted as a good inflation hedge, but its price is actually quite volatile. In my experience, making money in precious metals requires getting in and out of the market at exactly the right time, every time. The experts will tell that it’s not possible to time the market consistently no matter how smart or lucky you are. Furthermore, gold doesn’t always live up to its hype especially when inflation is moderate. It’s returned an average of 5.2% per year between March 1990 and March 2021. Over that same time period, the S&P gained 10.4% on an annualized basis with dividends reinvested[LS1] .
Rather than worry about increasing prices, prepare for them by reviewing your financial plan with an eye toward protecting your purchasing power. If your dollars are worth less in the future, you’ll need more of them to maintain your chosen lifestyle. Keeping up with inflation can be challenging, but you can anticipate its impact and take action to adopt appropriate tactics for long-term savings and retirement income.