Inflation skyrocketed in 2021, jumping from less than 2% in 2020 to 7% year-over-year. It climbed as high as 9.1% in June 2022 before beginning to ease just in time for the holiday season. But even though the worst inflation may be behind U.S. consumers, experts say prices will remain high for some time, especially for services.
No one may feel the effects of inflation as acutely as retirees, whose nest egg doesn't come with annual raises beyond the occasional cost of living adjustment (COLA). Though longevity risk, or the risk of outliving your money, is the greatest financial risk retirees face, there are ways to remain financially resilient even during high inflation.
4 Ways to Battle
Delay taking Social Security
While retirees don't benefit from annual pay raises, they aren't entirely on their own — Social Security payments come with some inflation protection. In fact, around 70 million Americans look forward to an 8.7% increase in their benefit checks in 2023, which could prevent you from cutting crucial expenses to offset rising prices.
But there's an even better way to increase your benefit payments: Delay taking them.
Social Security benefits increase for each month you delay starting your benefits after you reach your full retirement age, which for people born in 1960 or later, is 67. By simply waiting to claim your benefit, you could be setting yourself up for a bigger paycheck in retirement, which can help combat high inflation.
The catch is that these increases stop when you reach age 70, so don't delay past then.
Analyze your budget
You can't always control how much money you have coming in, but we almost always have at least some control over how much we spend. If you’re worried about inflation affecting your cost of living, review your budget to see if there are areas you can trim. For example, if you use both Amazon and Netflix for watching movies, perhaps you can cut one — or both.
The easiest places to cut expenses are discretionary spending on things you want or enjoy but don't need, such as entertainment or travel. But you can also find ways to shrink the other necessary expenses in your budget. Food, for example, is a necessity, but getting delivery is five times more expensive than cooking at home on average, according to a Forbes study. Even meal kit services are three times as expensive as doing your own shopping and prep work.
Health insurance is another area of your budget to look over. For many seniors, Medicare is the best insurance plan, but it doesn't always provide enough coverage. If you anticipate higher health care costs in retirement, you may want to explore other options or, at the very least, get a Medicare Advantage or Medicare Supplement plan to help ensure you're not going to be on the hook for unexpected costs.
When cutting costs, start with the easy items first. If dining out is important to you, you could trim in other areas like entertainment or shopping instead. Once you've worked through the low-hanging fruit, you can try to reduce other expenses until you have a comfortable buffer between your income and expenses.
Housing is one of the most significant components of most people's budgets. Americans spend more than $22,600 per year on housing on average. It's not uncommon for retirees to find themselves in a house larger than they need after the kids have all started their own families.
One way to reduce your expenses in retirement is to move to a smaller house or lower cost of living area. Smaller homes also come with less maintenance and lower utilities costs and homeowner's insurance.
That said, there can be disadvantages to downsizing, too. For instance, moving expenses are an important factor. Similarly, if you've already paid off your current home, you may not want to take on a new mortgage, even if it comes with lower utility and insurance costs.
Revisit your investments
You may have built a solid investment portfolio during your working years, but the same asset allocation may not serve you as well in retirement. The goal is to have a portfolio that generates a return equal to or greater than inflation each year. This can be a tall order if inflation is averaging more than 7%.
When you're relying on your portfolio for income, it's important to have an appropriate mix of growth investments like stocks, income-producing investments like bonds and cash for regular expenses. Even though stocks carry more risk than bonds or cash, they're important to help your portfolio keep pace with inflation.
Some investors even like diversifying into precious metals, particularly gold, in times of economic uncertainty and inflation; spot gold is currently trading at $1,863 an ounce, an eight-month high.
Portfolio adjustments should be made with care, however. It's best to work with a financial professional who can make sure you don't take on too much risk. The goal is to remain financially resilient during inflation, which means being protected from too much downside risk and positioned to thrive from stock market growth.
Maxime Rieman is product manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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