Rising inflation is impacting everything from prices at the pump to the cost of groceries. As the cost of living continues to rise, concerns are mounting for those retiring in this inflationary environment. Inflation could impact your retirement lifestyle or even your decision of when to retire. Worried about whether you’ve saved enough or about the purchasing power of your savings? Here are four financial strategies to consider.
1. Learn from the past, but don’t fear it
If you’re nearing 65 years of age, you lived through an inflationary period in your 20s when the annual average inflation in the United States reached 14%. But the financial policies in place during the 1970s and 1980s that produced double-digit inflation aren’t what’s causing inflation today, and the Federal Reserve is more prepared to use a variety of strategies at its disposal to compensate for the economic impact of the COVID-19 pandemic.
If you’ve been through an inflationary period before, you might find the fear of the past motivating you to change your investment strategy. Don’t try to outsmart inflation with aggressive investments. Remain calm, save money where you can, and use traditional inflation hedges such as inflation-protected bonds and commodities to safeguard your retirement savings.
Take action: If you haven’t rebalanced your portfolio lately, speak to a financial advisor who can recommend the best inflation hedges for your particular financial scenario. Fight the impulse to gamble on risky investments, particularly if you’re nearing retirement and you don’t have a backup plan.
2. Control your spending
A March 2022 poll found the top change American adults planned to make in the face of inflation was to cut back on expenses. The first budget items to go? Nightlife, travel and social activities. Plus, they were holding back on larger expenses like home renovations.
If you’re nearing retirement, you might have a dream vacation planned or a major house renovation to do before you downsize. If you are concerned about the cost of goods rising, stalling some of these plans could be a good first step to making sure you live within your retirement budget. If you haven’t retired yet, saving more money now and spending less in the early years of retirement will give your funds more time to compound.
Take action: If you don’t currently have a budget, use a budgeting app to help you monitor your spending more closely. While you might have been on autopilot during the later years of your career, preparing for retirement in this environment could require you to be more intentional and aware of your spending than you have been in the past.
3. Don’t forget about health care costs
If you’re finding it necessary to revise your retirement budget, remember the rising cost of health care in your new calculations. Medicare saw a 14.5% increase in premiums for Part B in 2022. That was a record high increase in dollar terms.
Rising health care costs mean you’ll need to allocate an even greater percentage of your fixed income to staying healthy. You don’t want to get into a situation where you’re forced to choose between living expenses and health care or wellness activities. Planning ahead can help you determine the best way to save an appropriate amount of money to age in comfort.
Take action: If you aren’t currently using a health savings account, consider adding this to your tool set. These accounts have tax-deductible contributions, and withdrawals are tax-free when used on qualifying medical expenses. You might also want to consider long-term care insurance, which would add an additional monthly premium to your budget now but can cover the cost of long-term care toward the end of your life.
4. Consider delaying your Social Security payments
There is flexibility as to when you need to start receiving Social Security payments. While you can start as early as age 62, you can delay until you are 70 years old. There’s a benefit to delaying — the payment increases for each month between the two ages. If you can put off Social Security payments now, by continuing to work or living off your savings, this can benefit you down the road.
Another silver lining: Cost-of-living adjustments mean Social Security checks increase over time. The increase for 2022 was 5.9%; it is anticipated to be 8% in 2023. While that doesn’t totally keep pace with the annual inflation rate, it’s something to remember in your planning.
Take action: Not sure when to retire? Discussing your options with a financial advisor could be your best bet. You can calculate not only the added benefit of delaying your Social Security payments but also what extra years of earning and saving could mean for your compounding investments.
Even though we are living in a high inflationary period, this doesn’t mean you need to panic. There are tangible actions you can take to lessen the impact of inflation on your plans. Be prepared for some adjustments — you might need to budget more proactively or consider delaying your retirement — but with careful planning, you can find a way to balance your lifestyle goals with the current market realities.
Jolene Latimer has her Master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.
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