Manage the Effect of Inflation on Retirement Inflation can threaten even the most beautifully laid out retirement plans. Here are strategies.

Traditional retirement planning relies heavily on financial resources accumulated during working years and other sources of income received during retirement, namely Social Security. If you’re like many people, you have planned for these two sources of income to be sufficient to maintain your lifestyle during retirement.

But, as with any type of financial planning, there are factors beyond our control that can threaten even the most beautifully laid out retirement plans. Today, that factor is inflation, and it has many retirees concerned. However, there are strategies for managing inflation and mitigating its impact on your retirement and, ultimately, can increase your peace of mind.

How has inflation become a factor in retirement planning?

Inflation really hasn’t been a significant economic issue in the U.S. for decades. But then the COVID-19 global pandemic happened. COVID-19 paralyzed the global economy, and the world prepared for a prolonged downturn. In response, monetary banks and governments stepped in with very aggressive policy tools intending to hedge the downturn and jump-start a recovery. Their tools worked, and recovery happened much faster than most expected. In fact, the economy roared back. Businesses were met with high demand but struggled to keep up, hampered by worker shortages and unprecedented supply-chain disruptions. Input costs rose, and companies started passing these increases to the consumer.

In the most basic terms, a general increase in prices that reduces purchasing power is the definition of inflation. And that’s certainly where we are today.

How does inflation affect retirees?

Inflation can significantly impact retirement, and right now, it cannot be dismissed as a transitory occurrence. The?top five most significant costs?of retirees are housing, transportation, healthcare, food, and utilities. I bet all retirees have felt these in their pocketbooks already. With that said, each household can experience inflation in different ways according to their different lifestyles. Additionally, some research shows inflation can affect retirees even more because of its impact on healthcare costs. Healthcare costs can be very unpredictable, and if something catastrophic happens, it can undoubtedly derail any plan.

There are other reasons inflation is a concern for retirees beyond the fact it erodes purchasing power for goods and services. As mentioned previously, many retirees rely very heavily on Social Security payments. And while there is a cost-of-living adjustment (COLA) for Social Security payments, many believe it severely underestimates real inflation, further reducing retirees’ purchasing power.

What are strategies for managing inflation in retirement?

Even though inflation is an alarming issue now, there are some essential and effective strategies for managing inflation and minimizing its impact on your retirement:

1. Revisit your retirement plan

If you are working with a financial adviser, have them review your plan considering the higher inflation rate to see how it affects you in the short and long term. This review can allow you to make any necessary adjustments to ensure your plan remains intact and effective. Advisers should consider your own personal inflation rate based on your lifestyle, geography, and other unique situations. If you aren’t working with a financial professional, now might be an excellent time to get some valuable advice and insight that can help you weather the inflation storm.

2. Control spending and delay some expenses if possible

Excess demand and supply chain disruptions can cause inflation to escalate, as we are currently seeing. This has been widespread throughout the economy since the economy started opening back up from COVID-19.

It is also hard to tell how long these inflationary pressures will last, especially since Russia invaded Ukraine, as commodities, food prices, and energy prices have increased significantly, which has had a ripple effect on inflation around the globe.

However, as the government works to lower it, some analysts believe it is getting close to peaking. In addition, some of the larger ticket purchases, such as homes and cars, have definitely been pushed up by demand and lack of supply. With?higher interest rates being forecasted, it could reduce demand for housing, resulting in lower home price growth. If or when inflation starts to stabilize and come down a bit, it should correlate with certain items coming down at the cash register.

Remember, inflation reduces your purchasing power — how much you can get for each dollar you spend. So, it just makes sense to spend fewer dollars during this time. If you can wait to buy a car, you probably should. It is the same case for home prices. It may not be the best time to be looking for a house. We still have a vast inventory shortage, and the way the market tries to balance that out is to push the price of homes higher.

3. Delay Social Security payments.

Another way to combat inflation is to delay Social Security payments if you have not started them yet. The details are a little complicated. But, in the simplest terms, here’s why:

The Social Security Administration says you are entitled to full benefits when you reach your full retirement age (age 67 for those born in 1960 and later). If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.?If you were born after 1943, you get an annual 8% increase in Social Security from your full retirement age to age 70.

It’s a complicated formula, but the bottom line is the longer you wait, the more your monthly benefit will be. Also, some say the?upcoming COLA for Social Security payments?is expected to be around 5.9%. And while that’s greater than it has been for many years, an 8% increase on your total benefit amount is still much better.

4. Keep your portfolio balanced and diversified

There are many different investment strategies with varying opinions on how to position portfolios for higher inflation. But staying balanced and diversified can be the key here because so much depends on the investor’s risk tolerance, age, and how the current portfolio is already positioned. It would be best if you didn’t make dramatic changes to your portfolio in response to inflation and quickly changing market conditions.

Again, just as now might be a good time to revisit your retirement plan, it could also be an excellent time to review and rebalance your investment plan to help you navigate inflation risks. A financial adviser can suggest more sophisticated defensive strategies to help protect you against potential market losses.

5. Manage your emotions

Finally, the most important thing is to manage your emotions. Do not make short-term decisions based on fear, uncertainty, or panic. These emotions often create other problems that can be equally challenging to overcome.

I know it is easy to get caught up in short-term emotions but try to think back and remember that we have gone through times like this before. Change is inevitable. We will adjust, and this soon will pass.

During these challenging times, a financial adviser can be the voice of reason to help you avoid emotional decision-making. They can also help you create a plan with a wide range of possibilities designed to help give you the flexibility to withstand bumps in the road, keep your retirement on track, and alleviate stress and anxiety.

Unfortunately, outlining spending and savings can be a frightening exercise for many retirees. Inflation is a big concern, so remain focused on the financial things you can control, as listed above. By concentrating on these areas, you are putting yourself in a better position to navigate this period of uncertainty and higher inflation.

the author: Ashley Folkes, CFP?, CPWA?, CRPC?, RICP? , CEPA, is a senior financial advisor

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