One of the biggest threats to retirement savings is high inflation, which can drain your nest egg in a hurry if you’re forced to spend a lot more money on basic essentials. The Social Security Administration tries to ease the problem by providing an annual cost of living adjustment (COLA) that gives beneficiaries a higher monthly payment. But for those who have yet to retire, plenty of other economic headwinds can cut into retirement savings.
As with any financial strategy, one of the keys to dealing with those headwinds is to have a backup plan. In the case of high inflation, this might mean cutting back on discretionary spending so you can afford the essentials and keep building your retirement fund.
Here are three economic forces that could throw off your retirement savings, and how you can deal with them.
When prices of groceries, gas, utilities and healthcare go up — as they have in recent years — it hits seniors especially hard because many are on fixed incomes and have little financial wiggle room.
One way to help mitigate the risk is by keeping equities in your portfolio, The New York Times reported. The reason is that these assets often outpace inflation over the long term. Vanguard advises clients to maintain a balanced portfolio of half stocks and half bonds during the early retirement years. You might also want to put some money into annuities and inflation-adjusted bonds.
More than three-quarters (77%) of Americans ages 65 and older were homeowners as of 2022, according to data from the St. Louis Fed. When home prices go up (like they are now), homeowners can use that equity to their advantage by selling their homes for a profit and relocating somewhere less expensive. This gives them a major source of new capital to help offset slumps in other asset classes.
You can also tap into home equity through reverse mortgages and home equity loans, which can help you weather rough patches or pay for large, unexpected expenses.
“Housing equity might be an asset that you don’t normally want to tap, but it might be useful for something like a long-term care expense or if you’re finding that inflation is eating into your portfolio substantially,”Joel Dickson, global head of advice methodology at Vanguard, told the NYT.
No matter how well the economy keeps chugging along, some economists are still worried that a recession will hit sooner rather than later. When recessions do hit, they can have a big negative impact on 401(k)s and other retirement accounts. But even if you see your 401(k) balance decline, it’s important to not hit the panic button.
Eric Phillips, senior director of partnerships and strategic insights at 401(k) provider Human Interest, suggests staying the course during a recession.
“That’ll take some grit because it’s certainly not easy to see a drop in your life savings,” he told USA Today. “Money can be emotional, and it’s hard to manage the fear, anxiety, and other emotions that have you worried about your financial picture today and tomorrow.”
Cutting back on your retirement plan contributions during times of economic turmoil might be tempting, but it’s also risky. As USA Today noted, you’ll miss out on getting stocks when their values are deflated and therefore won’t see the benefit when the values move up again.
“Ideally, you’re invested with a long-term strategy in mind and, when the market returns, you’ll see the gains and growth,” Phillips said. “To get a chance at those gains, you’ll need to stay invested. If you pull your money out, you could miss out entirely.”
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