A few years ago, the Secure Retirement Institute developed a model designed to drive home an important but often overlooked fact: Inflation is a real danger to those nearing or in retirement, perhaps the greatest threat of all.
The Secure Retirement Model showed what inflation could do to the average Social Security benefit during a 20-year time frame.
SRI’s conclusions were eye-opening. A seemingly low 1% inflation rate would still consume nearly $35,000 of a senior’s benefits! If that rate were at a more likely 3%, the shortfall would be over $117,000! There is not much you can do about the economic and political factors that lead to increased inflation. However, if you are someone nearing or in retirement, you can design an action plan that will help blunt some of the impacts.
Things You Can Do Now To Combat Income-Draining Inflation
Reduce unnecessary spending and look for bargains. Everyone should do this, whether they are a senior or not. Spending a few hours with your budget will almost always result in the discovery of some “can do without” items. Also, don’t forget to take advantage of low-income and senior discount programs. Utility and cable companies usually offer these, even though they may not advertise them.
Start or contribute to an HSA. If you are still working and your company offers you the opportunity to start or add to a “Health Savings Account” (HSA)- do it! A Health Savings Account allows you to contribute to the account on a pre-tax basis. You can then withdraw money tax-free for qualified medical expenses, including Medicare premiums. In some instances, this money can pay for certain kinds of long-term care coverages, and other medical and dental expenses. The key to optimizing an HSA is to cover as many out-of-pocket medical and dental expenses as you can from other sources while allowing the HSA balance to continue to grow. Whether you use an HSA or not, you must have a plan for dealing with the high cost of health care in retirement.
Carefully and strategically invest and mitigate inflation. The stock market is insane. I get it. While I in no way endorse the idea that people in their 60’s and 70’s should blindly chase stock returns, there is something to be said about having some money in solid stocks or income-producing investments, such as real estate. You may have heard about the “investing time horizon.” But, with many people living well into their 80’s, even 90’s, that time horizon has become your life expectancy. You are very likely to discover that your retirement is as long or longer than was your career. That’s why I feel that many, if not most, retirees need some allocation to alternative investments to stay ahead of inflation. Otherwise, they could find themselves with a lot less spending power.
Consider things such as TIPS, which are inflation-protected Treasuries or REITs (Real estate investment trusts.) Whatever you do, make sure you have a trusted advisor or team of advisors consulting with you to make the most appropriate choices.
Delay taking Social Security until you must. If you are ready to retire and have alternative sources of income, you might consider delaying claiming Social Security benefits for as long as you can. It’s tempting to claim these benefits when you are first eligible at age 62 instead of waiting until full retirement age (66 for those born before 1955 and 67 for those born after 1960). “A bird in the hand is worth two in the bush,” right? But consider this: taking early Social Security will mean than your benefits are reduced by 25-30%! Waiting to claim benefits after your full retirement age will give you an 8% increase every year until you reach 70 and your benefits max out. This could help offset some of the effects of inflation.
Plan how to come down off the mountain. Your financial guide might have been great at helping the younger you achieve financial goals during the “accumulation” phase of your life. The financial plan when you get ready to retire, however, is a horse of an entirely different color. Most traditional planners have no experience in helping retirees manage the withdrawal of all that money they’ve saved. You should have a specific and well-designed plan that contemplates withdrawing cash in the most tax-efficient way. Doing so could mean pay fewer taxes than you need to and give you more spendable income.
To sum it up
Retirees and those within five years of retirement must take a pro-active stance when it comes to inflation. The impact of a long period of inflation will be far more devastating on your nest egg than any losses you suffer during a market correction.
Your retirement plan should include actionable steps to ensure you stay ahead of inflation when you are no longer bringing home a paycheck.
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