Are you retired? Has inflation been limiting your spending? If so, you might need to consider making some changes to your finances. Here are 5 things retirees should pay attention to during a period of high inflation.
What is Inflation?
According to Investopedia.com, inflation is a rise in prices, which can be translated as the decline of purchasing power over time.
How Does Inflation Impact Retirees?
Inflation impacts retirees when it comes to their largest expenses like healthcare, travel, and leisure. These expenses usually cost more during periods of high inflation. If retiree pensions do not have a cost of living adjustment or COLA, other legs of their retirement income need to pick up the slack. And while social security does adjust for inflation, it may not be enough. This might require additional withdrawals from portfolios to offset rising costs – putting further stress on portfolios, especially in down markets.
What can retirees do to combat a period of high inflation?
1. Reassess Living Expenses and & Short Term Goals
Retirees may wish to hold off on variable purchases that would add to an already stressed portfolio. They also may also wish to purchase necessary items before they inflate in price. Whatever the case, it’s important for retirees to reassess their living expenses and short-term goals to get the most out of their money.
2. Reassess Your Portfolio’s Withdrawals
It’s important for retirees to be aware of the increasing demand on portfolio withdrawals for income during times of high inflation, especially if asset values have recently decreased. They could consider ways to reduce portfolio withdrawals by exploring other options for liquidity and/or additional income if needed (e.g., reverse mortgages, HELOCs, cash value in life insurance, etc.).
3. Reasses Your Portfolios Holdings
Be cognizant of the increased levels of interest-rate risk associated with the fixed-income allocation of your portfolio. Consider maintaining, or increasing (if appropriate), your exposure to equities and other asset classes that may be better positioned to keep up with inflation. Keep in mind that longer bond durations will be subject to higher volatility if interest rates rise. To mitigate some of this risk, talk to an advisor about allocating more toward shorter bond durations, but be mindful of the difference in yield between short- and long-duration bonds.
4. Be Caution with Variable Debt
Debt instruments are also impacted by inflation. As the Federal Reserve raises interest rates, there’s less cash for buyers. This reduces transactions and makes the purchases that do occur much more expensive in the form of higher interest rates. For example, the Home Equity Lines of Credit, credit cards, and other variable debt instruments increase their rates because there’s less money to go around. All of a sudden buying a home or car is way more expensive. Making your credit card payment can be tough too if you carry a balance.
5. Make Tax Planning Moves to Improve Your Financial Plan’s Success
Periods of high inflation can be accompanied by downturns in the stock market and in turn, recessions in the economy. Typically stock corrections are a leading indicator of recessions. By the time a recession is declared, markets are usually headed back to new highs. So making smart tax planning moves like tax loss harvesting and Roth conversions while markets are down can boost the likelihood of your retirement’s success by adding what Vanguard calls Advisor Alpha. This is where advisors add value using strategies many DIY retirees are too nervous to do themselves.
Retirees are especially sensitive to inflation. Healthcare, travel, and leisure expenses increase fast during periods of high inflation. Many retirees also are reliant on portfolios for some of their retirement income, portfolios that impact inflation via interest rates on bonds and cash. If you’re experiencing inflation, consider talking to an advisor to see if you can figure out a plan to combat these 5 things that retirees should pay attention to during periods of high inflation.