As retirement approaches, it’s important to not only envision the fulfilling and enjoyable years ahead but also consider the potential impact of inflation on your financial well-being.
Inflation is a persistent force that erodes the purchasing power of money over time, and failing to account for its effects can jeopardize the stability of your retirement income. To safeguard your financial future, it’s a good idea to plan ahead and take proactive steps to mitigate the impact of inflation on your retirement nest egg.
From reviewing your investment portfolio and considering inflation-protected securities to adjusting your savings strategy and exploring cost-of-living adjustments, GOBankingRates asked the experts what older Americans should do to plan ahead for inflation before retirement.
Inflation is an undeniable reality, but panicking is the worst course of action. Making hasty and fear-driven decisions can lead to detrimental financial losses.
Maintaining a calm and rational mindset allows you to stay focused on your long-term financial goals and make well-informed decisions that align with your retirement objectives, regardless of the challenges posed by inflation.
Continue Contributing to Your Retirement Accounts
Staying the course with your retirement accounts is a smart approach to prepare for inflation. Whether you choose to keep your 401k with your former employer or roll it over into an individual retirement account, it is important to continue contributing to it.
By taking advantage of discounted stock prices, you can potentially benefit from market gains and accumulate funds that will be valuable in the face of rising living costs caused by inflation.
Diversify Your Assets
When planning for retirement (and inflation), it’s a great idea to make a point of diversifying your assets, says Adrienne Ross, CFP, founder of Clear Insight Financial Planning, LLC.
“There is never a bad time to diversify with an eye on retirement income,” said Adam Goetz, a partner at Burstin & Goetz in Pittsburgh and president of MassMutual’s advisors’ association.
“It is crucial to build retirement assets that are non-market correlated. Laddered bonds, money market funds and cash values inside of life insurance policies can all be powerful tools.”
By incorporating these strategies into your financial plan, you can establish a strong basis for safeguarding your financial future and mitigating the effects of inflation.
Decrease Your Stock Exposure
As individuals approach retirement and prepare for the potential impact of inflation, experts recommend adopting a more conservative approach to investment portfolios.
Brett Tharp, a Certified Financial Planner (CFP) and advisory live training specialist at eMoney, suggests gradually increasing exposure to bonds while reducing stock exposure as individuals enter their 50s and progress into retirement. Tharp highlights the convenience of target-date funds as a means to achieve this reallocation effectively.
For those uncertain about the ideal bond allocation, following a standard guideline can provide clarity. Andrew Latham, the content director for SuperMoney, suggests a rule of thumb: individuals who are only a few years away from retirement should aim to keep at least 60% of their assets in high-grade bonds. Once retirement is reached, this allocation should be further increased to 70% or more.
By adhering to these principles and adjusting investment strategies accordingly, individuals can potentially enhance the stability and resilience of their portfolios as they transition into retirement, protecting against inflation in the years ahead.
Use a Bucketing Approach
Approaching retirement brings a set of unique financial considerations, one of which is the potential impact of inflation on the purchasing power of retirement savings.
To mitigate the effects of inflation, many financial experts recommend utilizing a bucketing approach. This strategy involves dividing your retirement portfolio into different buckets, or segments, each designed to serve a specific purpose and address specific timeframes.
One of the main advantages of the bucketing approach is its ability to provide a clear framework for managing inflation risk. By allocating assets across different buckets with varying investment strategies and time horizons, individuals can align their portfolio with their short-term and long-term income needs. The approach typically includes a combination of conservative investments for near-term cash flow requirements and growth-oriented investments to combat the erosion of purchasing power over the long term.
“For retirees or near-retirees, we suggest using a bucketing approach for your investments, where you should have a mix of investments that fund spending now, soon or later — not just one big pie chart with a bunch of assets for one goal,” said Rob Williams, managing director of financial planning at Charles Schwab. “If someone is closer to retirement and needs part of their savings sooner, then that money should be invested more conservatively.”
Come Up With a Plan for Retirement Income
When preparing for retirement, it’s a good idea to establish reliable income streams that will sustain you beyond your working years and provide resilience against the impact of inflation.
You should focus on your income plan as much as, if not more than, your accumulation plan. While continuing to grow your assets is extremely important, you should also have a plan to monetize those assets and maintain an income stream.
Since no one can accurately predict the economy, you have to consider a lot of different factors in your income plan. According to Fidelity Investments, “A retirement income plan should include guaranteed income, growth potential and flexibility.”
Consider Deferred Annuity Options
While annuities have sometimes received criticism, they can play a valuable role in addressing the challenges posed by inflation while offering a unique combination of income and security.
According to Goetz, integrating annuities into one’s investment portfolio can provide a sense of protection while still allowing for potential growth. By exploring efficient deferred annuity options available in the marketplace, individuals can complement their well-diversified investment portfolio and gain significant growth potential.
Consider Working Part Time in Retirement
Maintaining employment during retirement can provide a reliable source of income and serve as a valuable strategy for combating the effects of inflation. By proactively considering potential part-time employment opportunities before retiring, individuals can position themselves for financial success in the face of rising living costs.
Steve Gickling, founder of ETLrobot, emphasizes the importance of continuing to work, even in a part-time capacity, as it can offer a supplementary income stream that adjusts to different market conditions. Engaging in gig roles or leveraging one’s talents can contribute to a more secure retirement by providing additional financial resources.
Moreover, working during retirement offers benefits beyond financial considerations. It provides an avenue to stay mentally and physically active, fostering a sense of purpose and fulfillment during the retirement years.
Create a Retirement Budget That Isn’t Dependent on Market Conditions
Goetz advises creating a comprehensive and practical retirement budget that clearly outlines which income sources will cover specific expenses. It is important to factor in inflation during the planning process to ensure your financial preparations align with the potential impact of rising costs.
“Try to separate ‘wants’ — travel, entertainment, etc. — from ‘needs’ — housing expenses, food, taxes, insurance, etc.,” he said. “For the needs column, link expenses to guaranteed income sources, such as Social Security, pensions and income annuities. This approach can take a lot of pressure off of the income that is needed to be generated off of investment withdrawals as adjustments can be made if market conditions allow for it. It is much better to take that trip around the world off of an IRA withdrawal following a great market year.”
You might even practice living off your expected retirement budget to ensure you have budgeted correctly. Since you typically spend less during retirement than in your income-producing years, “doing so can also help you put aside more money for retirement because you won’t be spending money on unnecessary expenses,” said Chalmers Brown, co-founder and former CTO of Due.
Create a Fund for the ‘Expected Unexpected’
Because the effect of inflation can hit at unexpected times, it’s important to have access to liquid funds.
“We recommend all investors set aside cash for emergency expenses,” Williams said. “Retirees or near-retirees should have enough cash to cover at least one year of expenses, and those not yet in retirement should have three to six months of expenses.”
Rather than thinking of this as an emergency fund, Ross finds it more constructive to think of this as “a fund for the expected unexpected” — because life happens and so does inflation.
Cancel Unused Subscriptions
A 2022 C+R Study found that Americans spend an average of $219 on subscriptions each month — a $133 difference from the estimated average of $86 per month.
Now is the time, as Thomas Smyth, founder and CEO at Trim advises, “to get your financial house in order. Go through your credit cards and cancel any unused subscriptions,” he said.
If you don’t want to search and eliminate manually, apps like Truebill can help you find recurring subscriptions automatically.
Look For Ways To Save On Fixed Expenses
There will, of course, be some expenses you are unable or unwilling to eliminate. To plan ahead for future inflation, look for ways to save on costs today.
“It’s likely that you’re overpaying for your cell phone bill and for services such as cable TV and internet,” said Leslie Tayne, founder and managing director the debt solutions law firm Tayne Law Group.
“Shop around and see if you could save by switching, and in the meantime, call your service providers and see if there are any ways for them to lower your bill, either temporarily, permanently or both. The lower your cost of living, the more of a cushion you’ll have for the unexpected events in life. This means a good work-through on your budget now and for retirement.”
Negotiate Any Outstanding Debt
Ideally, you won’t take your debt with you into retirement. This means focusing on paying down any debt you have now, including your mortgage, credit card bills and medical debt.
Plus, the sooner you do it, the less you’ll have to consider the additional cost of inflation. Consider calling your lenders to ask for lower interest rates to make this goal more attainable.
“Negotiate all of your bills — especially medical bills,” Smyth said.
Contribute Money to Savings Every Week
Your investment accounts should not be the only place you hold retirement savings, as they are obviously vulnerable to a recession, market crash, or other economic trouble. While inflation is growing, so can your money.
“Set up a high-yield savings account and move money into it automatically every week,” Smyth said.
“High-yield savings account” has been a bit of an oxymoron for many years, but with the Fed continuing to raise interest rates, higher yields could be back on the menu soon.
Open a Savings Account Instead of a CD
If you don’t need immediate access to funds, financial advisors often suggest opening a certificate of deposit (CD).
These accounts offer higher yields than a savings account — but not until interest rates tick up a little further. These are the investments that help you stay ahead of inflation.
“There are many online savings accounts that will pay more than the average 12-month CD rates currently available,” said Ross.
Put a Pause on Major Purchases
Your focus should be on saving, not spending, which means reevaluating any plans to make major purchases — and if you’re not spending money, you’re not having to worry about inflation.
“If you had been thinking about a vacation or new car, hit pause and ask if that still makes sense right now,” said Amy Diesen, vice president of retail retirement plans at Ameriprise Financial.
Don’t Be Overly Generous With Children and Grandchildren
To combat inflation, it’s essential to prioritize holding onto and investing your assets. Overspending on your descendants or continuing to financially support adult children who should be independent can jeopardize your financial stability in later years.
Diesen advises caution when considering taking on the financial burdens of adult children or grandchildren. While they may have options like student loans for education expenses, your retirement funds cannot be replenished with loans. It is crucial to make judicious decisions to protect your own financial well-being and ensure a secure retirement.
Have a Plan for Collecting Social Security Benefits
Collecting Social Security can help you delay the need to dip into your other retirement assets — which is a great way to keep your money working for you and help you fight inflation.
“Social Security can be an excellent supplement for your retirement income,” said Mack Bekeza, a CFP and wealth advisor with Accelerated Wealth, LLC. “To know what your expected benefit can be, go to SSA.gov, create an online account and make sure that your earnings history is accurate and your estimated benefit should appear. Although the benefit won’t take care of all of your income needs, it is still worthwhile to utilize. Also, remember that there are numerous Social Security strategies to maximize your benefits.”
One way to increase your benefits is to delay collecting them.
“Delay [taking] your Social Security benefits as long as possible,” said Jon Bradshaw, founder and president of Codebase.com. “That way, you can have those additional funds to help you during all types of potential recessions that may hit during retirement. It can mean a few extra hundred dollars a month, which can be valuable on a fixed income.”
Hold Off on Withdrawing From Retirement Accounts
If you’re nearing retirement, avoid making any withdrawals from your retirement accounts until it’s absolutely necessary — when your money is making money, that investment income is going to provide a cushion against inflation.
“Taking distributions now will lock in losses, reduce your principal and make it difficult to achieve a sustained lifetime withdrawal,” said Kelly Crane, senior vice president and investment advisor with Wealth Enhancement Group.
Take Care of Your Health
Health care costs are among the biggest expenses for nearly all retirees — but a lot of the power to lower those bills lies in your hands.
“To recession-proof your retirement when you are close to retirement, focus on maintaining good health to minimize otherwise unnecessary healthcare costs that consume your retirement funds,” said entrepreneur and online influencer John Rampton. “It’s also good to plan for Medicare and purchase supplemental medical insurance to protect your retirement money.”
Plus, it’s an easy way to combat inflation. By allowing your investments to grow and generate returns over time, you are positioning yourself for a rewarding retirement experience.
Seek Professional Guidance
Whether you are nearing retirement or still have time to plan, the best way to plan ahead for inflation can vary from person to person. Getting expert advice can help ensure you’re on the right track.
“If people need guidance, working with an advisor is helpful to map out a financial plan,” Tharp said.
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