If you’re tired of paying more for food, gas, clothes, and rent — and just about everything else these days — you’re not alone. Inflation has been upsetting household budgets for months and its momentum does not seem to be weakening.
Fixed-income retirees will most likely feel the pinch on their wallets for at least the next few months. If you haven’t already, now is the time to review your budget, income plan, and wallet to protect your purchasing power.
As we navigate the first few months of 2022, here are some specific planning points to keep in mind:
Do you have a backup plan for your income plan?
This year’s historic 5.9% Social Security cost-of-living adjustment (COLA) will help retirees cope with rising prices — but probably not as much as many had hoped. Indeed, Medicare Part B monthly premiums have also seen a larger increase this year. Standard monthly premiums for Part B are now $170.10, up 14.5% from $148.50 in 2021.
Most Social Security recipients whose Part B premiums are typically deducted from their Social Security benefits will still see a net increase in their monthly checks. But that probably won’t be enough to fully offset the increased costs if inflation persists for a while. And some private pensions do not offer automatic COLAs. You may find it necessary to change your budget or turn to another source of income (such as a temporary job, home equity loan, etc.) to make up the difference.
Is your investment plan designed to deal with rising costs?
Let’s face it, inflation is not a new or unexpected risk for retirees. Even relatively low inflation rates can have a detrimental effect on your purchasing power over time.
It is therefore essential to develop an investment plan that can help you keep pace, whether costs are skyrocketing, as they have been recently, or they are slowly increasing over time.
Inflation hedging strategies should be a well-thought-out long-term component of your retirement portfolio, and your financial advisor can help you choose the best products for your needs.
This could mean looking at the pros and cons of investing in commodities or real estate, both of which tend to rise in value during times of inflation. Or it could mean buying US Treasury Inflation-Protected Securities (or TIPS), which offer the security of government-backed bonds, but with interest payments designed to rise with inflation.
Your advisor will likely recommend that you leave part of your portfolio invested in stocks so that your money continues to grow during a long retirement. Stocks are unpredictable, of course, but historically the market has provided patient investors with returns above inflation.
Are you reacting to the hype or your reality?
One of the most important things to keep in mind moving forward is that now is not the time to panic.
Economists do not expect the double-digit inflation rates the country experienced in the 1970s and 1980s.
It is also important to note that some of the categories hardest hit by current inflationary pressures are not a factor for many seniors. If, for example, you own your own home (like most Americans over 65), you don’t have to deal with today’s rising rental costs. And if you’re in the final years of retirement, chances are your day-to-day expenses have already been reduced or could be reduced. (You probably drive less, travel less, can get by with a smaller wardrobe, and might find it easier to keep your grocery bills down than a young family.)
Don’t let buzzy headlines pressure you into making instinctive moves that aren’t necessary or that might even hurt your long-term plans.
Yes, if you sit back and do nothing, inflation can eat away at your savings and impact your retirement lifestyle. But by reducing your expenses where possible, finding a sensible solution to close any potential income gaps, and incorporating inflation hedging strategies into your investment plan, you should be able to soften the blow.
Kim Franke-Folstad contributed to this article.
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Founder, Ensign Wealth Management
Chad Ensign is an investment advisor and founder of Ensign Wealth Management. As a Certified Retirement Income Professional (RICP), he focuses on helping clients through thoughtful income strategies. He founded his independent business to better serve customers by offering a wide range of products.