Americans are spending more money because of high inflation — this can be a big problem for older individuals living on a fixed budget.
Inflation is at a 40-year-high, at around 7.5% in January, according to the consumer-price index. Retirees, many of whom are not bringing in income outside of withdrawals for their retirement accounts and Social Security benefits, will have to compensate for those additional costs.
For some, it may mean taking out more money from their 401(k) plans and IRAs, which can disrupt a retirement spending plan, while others might try to cut expenses to make ends meet.
“Inflation is one of the biggest risks for retirement,” said Thomas Rindahl, a certified financial planner at TruWest Wealth Management Services. “It diminishes a retiree’s purchasing power at a time when they aren’t able to replenish it.”
The prices may reflect inflation in food, housing and utilities, as well as healthcare.
“Inflation is known as the silent killer for a reason,” said Bradley Lineberger, a certified financial planner and president of Seaside Wealth Management. “It reduces your purchasing power over time and if not combated can decimate a well-designed financial plan.” Take for example inflation at 3%. Someone who spends $5,000 a month would see her purchasing power decline to $3,720 a month in 10 years, and to $2,760 in 20 years, Lineberger said.
See: Planning for retirement? You should also plan for inflation
The good news: Not everyone should assume just because the inflation rate went up that they’re immediately experiencing it, said Jordan Benold, a certified financial planner at Benold Financial Planning. “Each person has their own personal inflation rate,” Benold said. Someone without a car won’t see the inflation of gas prices, and if retired couples eat at home more than out they won’t feel the increase in restaurant bills (though they will after a trip to the supermarket). “Overall their personal inflation rate will be much lower than the overall inflation rate numbers.”
Still, inflation should be considered when planning for retirement – and some retirees may want to make adjustments to their portfolios after consulting with their advisers.
One way to protect retirement assets from inflation is with higher-risk investments. “Retirees must now assume more risk/volatility in their portfolios in order to combat inflation,” said Tom Balcom, a certified financial planner and founder of 1650 Wealth Management. This could be with real-estate investments or dividend stocks, for example, or just increasing exposure to equities in general.
Retirees should strike a balance between risky and conservative investments. Taking on too much risk could put investors in danger of losing too much of their portfolio during downturns in the market. Although market volatility means what goes down may come up, retirees have a shorter time horizon for their investments and may need to tap into their accounts soon, if not regularly. At the same time, too little risk could mean that investments don’t grow as much as they need to for a secure retirement.
Those who have not yet retired, or who are able and interested, may want to keep working or take on a part-time job, said Sean Pearson, a certified financial planner with Ameriprise Financial Services. “If you are not comfortable that you have saved enough for 30 years, reducing early retirement expenses or working one more year may be simple solutions,” he said.