As high inflation persists, so do retirees and workers who are a few years away from retirement. A survey found that inflation is America’s biggest problem, and concern about it is acute among those 50 and older. Another survey found that four out of five Americans in this age bracket express discomfort with inflation in retirement, with 84% of pre-retirees feeling this way compared to 76% of retirees.
No wonder. The summer of 2022 has been white-hot with inflation rising 8.3% year-over-year in August, prompting another significant interest rate hike by the Federal Reserve . Inflation reduces purchasing power and can be particularly problematic for retirees who live on fixed incomes and savings. For those in the later stages of their professional career, inflation may reduce the amount they have saved for retirement. Meanwhile, a volatile stock market is heightening the worries of pre-retirees and retirees, causing them to reconsider certain investments and wonder if they will outlive their nest egg.
What can retirees and pre-retirees do to ease their retirement worries and protect themselves against inflation? Here are a few tips:
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1. Do a thorough budget analysis
Break down your monthly budget and take a close look at everything you spend. The further back you go, the better; it’s the most accurate way to find spending habits (including where you’re overspending) and see how inflation is affecting you. Ideally, go back three to six months in your bank and credit card statements and make a detailed list of the money you spent.
Once you’ve done that, refine your budget and stick to it. First, assess your fixed and variable expenses. Fixed costs are expenses that are the same, or relatively constant, from month to month – rent or mortgage, phone, utilities, cable, and insurance payments. Variable costs fluctuate more. They include restaurant meals, groceries, entertainment, clothing, etc.
Add together the fixed and variable expenses for a given month and subtract them from your monthly income. A negative number means you have a deficit; a positive number means a surplus. When you’re in the red, see what you can cut or reduce from your variable expenses. If you have a surplus, consider channeling some or all of it into paying down debt or adding to an emergency savings fund.
2. Consider inflation-protected annuities
An inflation-protected annuity (IPA) tends to provide a lower payout than other annuities, but it can be useful for retirees living on a fixed income. IPAs offer guaranteed fixed payments for a fixed period or for life. API payments are generally indexed to inflation based on an annual cost of living adjustment.
Since Social Security increases have tended to lag behind general inflation, APIs can help bridge that gap.
3. Pull money, keep your portfolio balanced
High inflation and rising interest rates have hurt the stock market, but what you don’t want to do is take distributions on equity holdings during a bear market. Doing it early in retirement can cause a heavy blow. You will need to sell more shares to generate the income you need than you would if the stock price were higher. And after selling, you would miss the rebound; you would be left with fewer stocks that could benefit from the next favorable market.
Having cash on hand will help you stay invested. Pull cash instead of selling stocks or making additional withdrawals from retirement accounts. Focus on a balanced portfolio and consider dividend-paying stocks, growth stocks and real estate, all of which are designed over a long period to provide retirees with diversification and inflation risk protection.
4. Delay applying for Social Security benefits
If you’re nearing retirement age and worried about the impact inflation might have on your golden years, it might be worth considering delaying the start of your Social Security payments. You can start receiving the payments anytime between age 62 and 70, but the payment increases for each month you delay until age 70. The good news is that cost of living adjustments (opens in a new tab) help increase the average Social Security check over time. The increase for 2023 is 8.7% (opens in a new tab)the biggest increase since 1981. If you delay the start of Social Security payments, you’ll have to rely on your savings or keep working to generate income until you start getting your benefit check.
5. Downsize and move
The rise in the cost of living has particularly affected retirees on fixed incomes. Downsizing to a smaller home is one way to reduce expenses. If you have paid off your mortgage or are about to pay it off, you have the equity in the property, and in areas where house prices are higher than they were l last year, you could sell your house and move to a less expensive place.
Inflation impacts all income levels, so downsizing is also a viable option for those in the middle or late stages of their careers. The decision comes down to whether keeping a bigger house hurts your finances, as the bills associated with the house push what you can afford.
We don’t know when inflation will be brought under control, but it’s still an important factor to consider in retirement planning – and to accommodate when you’re retired. Be proactive as much as possible, as there are many steps you can take to mitigate the effects and not let it upset your retirement plans.
Dan Dunkin contributed to this article.
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