The once sleeping giant, inflation, has awakened and is causing concern among many pre-retirees who want to know how much their retirement dollars will buy. You, too, have valid concerns that should be addressed through careful financial planning. 

Inflation poses existential retirement risks: 

• Will I outlive my money? 
• Will I be able to enjoy the retirement lifestyle I envisioned? 
• What should I do now to protect my nest egg from the ravages of inflation?

Did you get a late start to retirement planning in The Carolinas and need help answering these questions? Global View can help!

The Impact of Inflation

Inflation is a general rise in prices and a decline in money’s purchasing power. For folks nearing retirement, inflation’s impact on post-retirement lifestyles can be substantial, especially when considering the costs of medicine and health care. 

The first step in planning your defense against inflation is to understand how it will impact your various sources of retirement income:

• Social Security: The Social Security Administration addresses inflation in two ways. The first is to index earnings to reflect the standard of living over a worker’s lifetime. The SSA multiplies each year’s taxed earnings by an inflation factor to calculate the indexed earnings that determine your base benefits. 

Secondly, benefits receive an annual cost of living adjustment (COLA) based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). These two adjustments help ensure that your Social Security benefits will keep up with average inflation, but not necessarily the price rises in housing and medical care.

• Pensions: Some retirees receive inflation-adjusted pensions. However, most employers nowadays offer defined contribution plans (i.e., 401(k)s), which respond to inflation according to how contributions are invested.

• Required Minimum Distributions: RMDs begin at age 72 for qualified retirement plans and IRAs. These distributions are not indexed to inflation, but your choice of investments can help plug an inflationary deficit. 

• Annuities: Fixed annuities are not indexed to inflation unless they include an extra-cost rider. Riders guarantee a set percentage-point increase in your annuity income, which might be enough to keep up with inflation. Variable annuities can use stock investments to help keep up with inflation.

• Home Equity: Your home’s equity is equal to its current value minus any mortgage balance. Real estate values tend to benefit from inflation (up to the point where mortgages become too expensive), which means you may be able to extract more money from your home (i.e., through home equity lines of credit or reverse mortgages).

A model showing the impact of inflation on Social Security benefits over a 20-year span found that a 1% inflation rate can destroy more than $34,000 of retirees’ benefits. A 3% inflation rate would swallow up more than $117,000 over the two-decade period. The culprit behind these numbers is medical inflation, which tends to exceed Social Security COLAs. 

The New York Times reports that, over the past 21 years, Social Security benefits rose 55% from COLAs, but housing costs went up almost 118%, and health care costs saw a 145% increase. The upshot is that Social Security benefits have lost 32% of their buying power since 2000.

To make matters worse, increases in Medicare premiums and other medical costs partially offset Social Security COLAs. Therefore, you want to extract the maximum value from your Social Security benefits, an outcome you can achieve by delaying your claim for as long as possible – up to age 70. Talk over your ideal retirement age with a tax and investment advisor in the Carolinas.

The CPI-W increased by 8.2% in the 12-months ending in January 2022. That’s a mighty sharp increase, warranting a total review of your retirement plans. 

What Should Change in My Retirement Plan Due to Inflation?

An excellent place to start is by reviewing your retirement investments. Generally, fixed-income securities do not keep up with inflation. One exception is the Treasury Inflation-Protected Security (TIPS), whose principal value is indexed to inflation. However, TIPS yields continue to be negative, meaning holding them until maturity locks in a loss.

Stocks are the classic hedge against inflation. Real returns (i.e., returns after inflation) on the S&P 500 are highest when inflation rises at a 2% to 3% rate. Higher inflation rates increase stock market volatility, which may cause discomfort for some investors.

Value stocks are the better option during high inflation, while growth stocks perform well when inflation is low. This suggests that portfolios dominated by fixed-income securities and/or growth stocks might need rebalancing. But bear in mind that when inflation gets too high, it squeezes corporate profits and can lead to hiring freezes that hurt the economy and presage a recession. 

Each retiree must deal with unique factors that help determine the ideal asset allocations to cover inflation. Too big an investment in stocks may increase the overall volatility of your nest egg to the point that it exceeds your tolerance for risk. Too small a stock allocation may leave you with tiny or even negative real returns due to inflation. 

Complicating factors include your overall wealth, the planned time horizon for retirement, your sources of post-retirement income, your age and health, and your obligations to beneficiaries. 

In addition to healthcare costs, you may be concerned with the influence of inflation upon travel, housing, and even supporting other family members. In other words, there are no cookie-cutter solutions to the proportion of your assets exposed to stock market risk. 

This is especially true when you have the option to downsize your home, reducing your housing costs and cutting the impact of higher prices for utilities, maintenance, homeowners’ insurance, and property taxes. 

How An Advisor Can Help

Rebalancing a portfolio and the other counter-inflationary steps open to you may seem confusing and at cross-purposes. That’s why it’s wise to engage a professional financial advisor to help plan your retirement. Our investment advisors in Greenville, SC, provide customers with Carolina retirement planners who understand your concerns for a comfortable lifestyle during your golden years. 

Schedule a no-obligation conversation with the Global View team to see how we can help you with portfolio management and beyond.

We work with you to rationalize your assets and expand opportunities to fight the adverse effects of inflation. It requires an integrated approach encompassing your investments, real estate, insurance, taxes, and estate plans. If inflation keeps you up at night, contact us today to sleep and live more soundly. 

Download our free eBook to learn how to catch up with retirement planning! A trustworthy financial advocate acting as a  fiduciary will put your goals first. Then call us with questions!