What Can I Do to Stop Inflation From Wrecking my Retirement?
There's no question that inflation can be a real pain for investors. Over time, the purchasing power of your money erodes. While you can't stem the tide of inflation, you can take a proactive role in lessening its effects:
1. Review your expenses and make sure you're not overspending
Living below your means is one of the best ways to protect your finances. But even staying within your current standard of living takes self-discipline: a study in 2015 from the Employee Benefits Research Institute found that while average spending decreases in retirement, 45.9% of retirees spend more in the first two years of retirement than they did in the previous year, and a third still do so into their sixth year.
Why? Arguably, having more time on their hands to fill with luxuries, shopping, and travel. Take a hard look at your expenses and make sure you're not letting your lifestyle creep up on you. And find a cheaper hobby! Here's a list of ideas that might make you more money.
2. Consider downsizing - but beware of the rental ramifications
One way to cut costs is by downsizing your home. This reduces the monthly outflow on things like mortgage payments, utilities, taxes, and homeowners’ insurance - and can free up some cash. Of course, this strategy is not for everyone: some people might not want to leave the family home they've spent years in, while others might not have the equity built up to make it worth their while.
Some prefer the flexibility of renting over the stresses of home ownership. However, there's the consideration of finding a rental that's affordable in retirement. Inflation can have a direct effect on the amount you'll need to spend on your rental each month. Nationally, rental costs have increased 5.1% year-on-year. Keep an eye on costs in your area and factor this into your downsizing decision.
Incidentally, because rental is inflation-correlated, you could consider investing in a real estate investment trust (REIT) as part of a diversified inflation-proof portfolio. Publicly traded REITs offer investors exposure to a portfolio of properties, which can include apartments, offices, shopping centers, hotels, and warehouses. As the cost-of-living increases, so too does the demand for rental units, which can lead to higher rents and occupancy rates—and subsequently higher REIT dividends for you.
3. Continue contributing to your retirement plan
Even if you're retired, it's still a good idea to contribute to your retirement plan if you are eligible and can afford to. This can help you keep up with the cost of living and maintain your standard of living during retirement.
You can continue to contribute after retirement to either a traditional IRA or a Roth IRA. However, it has to come from earned income, not income generated by assets, dividends, distributions, or interest (which makes it a good idea to take up a paying hobby/side hustle after retirement). Deferring money from a part-time job can go a long way into securing a successful, long-term retirement.
4. Plan your withdrawals carefully
If you have a 401(k) or traditional IRA, you're required to start withdrawing money at age 72, and the distributions are taxable. This could push you into a higher tax bracket. A withdrawal strategy is unique to every retiree as it will depend on their financial needs, tax brackets, sources of income, and projected life expectancy. This is where a working with a financial advisor can really make a difference in your long-term financial plan.
5. Make good use of Social Security
Social Security is a major source of income for most retirees, and it's especially geared to keep pace with inflation thanks to the Cost of Living Adjustment (COLA). Our government recognizes the purchasing power of a fixed income declines over time, so every year the Social Security Administration increases benefits in line with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But remember, while your benefits may keep up with inflation, they might not keep up with your previous lifestyle. You may need to make up the difference.
MOST IMPORTANTLY: Don't let panic cloud your judgement
Don't cash out of your investments just because the value of your portfolio has gone down. Stay disciplined with your retirement savings plan and reduce spending instead. Emotional reactions to market conditions can lead to making poor decisions that have long-lasting consequences. When the stock market is down, that's usually when you want to be buying, not selling. Or even just staying the course. Always remember, the market will eventually recover, and over the long haul it should work in your favor.
Take the time to review your portfolio and make sure you're on track to meet your retirement goals. If you need to, adjust ensure that your portfolio is still diversified and aligned with your risk tolerance. But whatever you do, don't let panic dictate your investment decisions.
Inflation can be a fickle beast. In times like these, you should seek advice from your fee-only financial advisor. (If you don’t have one, you can find some here). A fee-only financial advisor can help you develop a retirement plan designed to withstand the effects of inflation and keep up with the rising cost of living, including tax-loss harvesting strategies and investing in inflation-protected bonds. If you're retired or getting close, congratulations! You've worked hard and saved diligently for this moment. Let's work together on preserving your wealth.