If you are looking to retire in the next year or two, you’re probably not too happy with the rising costs of most goods and services over the past year (well, who is?). And while the numbers are coming down a bit, they’re still higher than normal.
What can you do to keep your retirement plans on course? Should you consider different income sources?
We’ll explore that question and 6 other strategies to consider.
Let’s dive in.
Why Is Inflation a Threat?
Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired.
The Consumer Price Index (CPI), which is a common measure of inflation, ended the year with an annual inflation rate of 6.5%, still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.
As the cost of goods rise, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.
What Can You Do to Safeguard Your Savings?
Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.
Reassess Your Budget
The first step in overcoming inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.
For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan.
Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run.
If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will be paid back with money that is worth less than it was when it was originally borrowed.
This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they will not earn the highest rate of return, but your purchasing power will remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
Diversify Your Income
Retirees often have several sources of income, but they are usually relatively fixed in amount. If your expenses are greater than these income sources, you will be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only will this improve your portfolio longevity and provide you with more flexibility in retirement, but it will also help minimize the impact of inflation.
Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:
- Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You will earn less than what you’re making now, but these options will provide flexibility and a form of income diversification that will keep your retirement savings safe from inflation.
- Use dividend-paying stocks. Often considered an annuity-like cash stream, dividend-paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth.
Consider Alternative Investments
Alternative investments are another option in the fight against inflation. Most have low correlation with standard asset classes, which can smooth portfolio volatility. Hard assets, like real estate, timber, oil, and gold, may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio may provide broader diversification, reduce risk, and increase returns.
Investments in securities do not offer a fix rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results. Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable.
Put Idle Cash to Work
You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation will eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate.
For instance, high-yield savings accounts are paying up to 4% interest as of December 2022. While this is still a far cry from the 6.5% inflation rate, it is much better than the 0% interest you would earn from most checking accounts.
There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is the best way to improve your portfolio longevity and safeguard your retirement.
Is Inflation Threatening Your Retirement?
If you feel like inflation could put a damper on your retirement plans, we’re here to help. As a boutique financial firm, our goal is to help clients improve their financial plans and get the most out of life. We approach your financial plan using the core values that matter most, including integrity, transparency, and respect. Email firstname.lastname@example.org or call 916-276-8677 to see if we’re the right fit to help you pursue your ideal financial future.
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
He has served as a board member for several nonprofit organizations and has been involved in Cub Scouts leadership and youth sports coaching. Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.