As part of your overall financial planning, keeping spending in check while thinking about the future helps you manage your purchasing power. Take a moment to review how you can help control your money once you've retired. As a CERTIFIED FINANCIAL PLANNER™ in Greenville, SC, we'll follow that up by addressing a few frequently asked questions about inflation, risk, and spending.
How to manage your money in retirement better
Inflation is the worst it's been in the last 40 years. It conspires to rob your retirement nest egg of its purchasing power by increasing the prices of the goods and services you buy. The problem for many retirees is that they live on a fixed income, even as costs increase. The last thing you want is to lose confidence in a comfortable retirement.
Don't let inflation derail your retirement plan!
This article provides five tips for staying ahead of inflation and preserving your purchasing power:
- Make a plan and a budget
- Adjust your expectations
- Save early and often
- Pay down debt
- Work in retirement
Make a plan and a budget
When prices rise, they can create a gap between your planned cash flows and your actual bills. This makes budget shortfalls that can accumulate over time. Although inflation's impact isn't uniform across all prices, retirees must pay special attention to the costs of items that affect them the most, such as health care, travel, and food. Expenditures in these areas are the most likely to deviate from your original plan.
You'll have to devise a revised plan and budget to accommodate these changes. This boils down to tweaking your spending and/or increasing your income. Careful shopping and disciplined spending discipline can help you reduce your monthly cash outflows.
In some cases, more significant action may be necessary, such as relocating and retiring in Greenville, SC, or downsizing where you are now. You may want to consider selling assets that generate expenses, such as a summer house or a boat, and investing the proceeds
In terms of income, you may want to revisit your investment portfolio to improve its total return — interest, dividends, and capital gains. You may need to take on more risk, perhaps by increasing your stock investments, but with the help of investment advisors in Greenville, SC, you can calibrate this risk more precisely.
Techniques such as diversification and asset allocation can help minimize unnecessary risk while allowing you to increase your return. As you make these changes, you'll need to draw up a new budget and monitor it carefully.
Adjust your expectations
No one wants to sacrifice long-held dreams. As a retiree, you may have plans based on expectations that you may have to alter due to inflation. For example, you may have to shave a week off of a one-month European vacation or hold onto a car longer than planned.
Health concerns may also require you to adjust your expectations. You can get more from your retirement if you adopt a flexible attitude toward your future plans.
Save early and often
We mentioned how smart shopping could save a considerable amount each month. A great idea is to invest those funds. You can ensure this by automatically contributing to your monthly savings and retirement accounts.
Moreover, you might want to increase your savings to keep up with the inflation rate. Consider reinvesting your interest and dividend income, so your earnings can compound over time. Your advocate advisors can suggest ways to increase your savings that minimize the tax impact while maximizing returns for the asset class.
Pay down debt
You want interest working for you, not against you. The interest you pay will almost always be greater than the amount you earn, so it makes sense to pay down your debt as quickly as possible. Other than that, on your mortgage, interest is no longer deductible, so you bear the full brunt of the interest you pay on your debts.
Consider consolidating your debts and then aggressively repaying the remaining loan. Eliminate all credit cards but one and pay it off monthly. As you reduce your interest expenses, sock away at least some of the savings into your retirement portfolio by increasing your income-producing holdings.
This is a way to put inflation to work for you, not against you.
Work in retirement
Many retirees miss work. Not necessarily the job you did pre-retirement, but some form of work you find satisfying and remunerative. The internet, spurred by the Covid pandemic, has altered the work landscape, making it possible to work at home, set your hours, and do only the type of work that pleases you.
You may postpone your Social Security claim by working in retirement, which means you'll collect a more considerable monthly benefit later.
Questions for retirees to consider
As retirement financial planners, we encourage you to ask yourself three questions. You can then discuss these answers with your financial professional because they will directly impact your retirement plans.
What will inflation do to my purchasing power?
You can expect your purchasing power to erode, but perhaps not as much as the rise in the inflation rate. If you receive Social Security benefits, you're shielded by the built-in annual cost of living increases.
Furthermore, higher inflation increases the interest rates banks pay on savings and can be positive for stocks. A financial advisor can help you quantify inflation's impact by resolving the positive and negative effects on your wealth.
How much risk am I comfortable with in preserving my purchasing power?
Successful investors look past market turbulence and take a long-term investment viewpoint. They understand that losing purchasing power may be more threatening than a market selloff.
Markets recover, and dips in the market are excellent buying opportunities. Work with your professional to develop a less knee-jerk reaction to current market performance. You may find you can tolerate more risk than you thought.
How should I be thinking about spending and interest rates in the future?
High and low inflation periods alternate, but each can last many years, even decades. It's best to respond to the current environment — things are unlikely to turn on a dime. Maintain your spending discipline, take advantage of high savings rates, and track your budget carefully.
Good financial habits can help you make the most of your golden years. Download our free eBook to avoid becoming another retirement horror story!