“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.
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.
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 9.1 percent from a year earlier in June 2022.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.
10 Ways to Make Your Money Last Against Inflation
1. 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 percent 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 percent less in terms of buying power 60 percent less.”
2. 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.“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 percent 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.
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 percent to 5 percent 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 percent of the time).
Here’s a hypothetical example. A 67-year-old man retires with $500,000 in retirement funds. Each year, he withdraws 4 percent, 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.
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 sky high. 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 percent 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 percent annual interest.
The problem? We don’t know if I bonds will continue to pay 7 percent after April. After all, every six months, interest rates are adjusted for inflation. As a result, they may rise or fall.
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 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.
- 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.
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 percent 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:
“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.
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.
Consumer price index data shows that new car prices inched upward 11.1 percent last year, even though auto loan rates are low. Over the past year, used cars have seen their inflation rate rise by 31.4 percent. 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.
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.
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.
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.
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.
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.
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.
As such, if you’ve taken the steps listed above, inflation should not deplete your savings.
