Don’t Let Inflation Ruin Your Retirement

by | Aug 16, 2023 | Insights, Retirement Planning

With costs rising seemingly faster than ever, you might be worried about inflation eating away at your retirement nest egg. You’ve spent years carefully planning and saving, and if you feel like your retirement security is at risk, it makes sense. But with these five strategies, you don’t have to let inflation ruin your retirement!

1. Build inflation into your financial plan

Your financial plan should include projections of how much you need to retire by your desired retirement date and clearly show you if you’re on track to meet this goal. Your plan should assume your spending will increase each year due to inflation, in addition to including a plan for taxes, healthcare, and day-to-day expenses.

In many plans, you’ll see something like 3% assumed for long-term inflation, which is historically reasonable. But in 2022, inflation peaked at over 9%, much higher than the average. This doesn’t mean you need to adjust your long-term assumption up to 9%, but in periods of higher inflation, you may want to review your projections more frequently to ensure you’re still on track.

2. Don’t abandon stocks

If you’re retired, rising inflation makes things feel more uncertain. During uncertain times, it’s tempting to flee to safety, moving volatile assets like stocks into safe havens like bonds or cash. But this can backfire, because interest on your cash isn’t likely to keep up with inflation and bonds can suffer as the Federal Reserve tries to bring inflation down. The Federal Reserve will often raise interest rates to curb high inflation. When rates go up, bonds often go down, causing bond-heavy portfolios to suffer.

While stocks may also see increased volatility, allocating for high dividend income can offset the need to sell shares and help you ride out the volatility.

3. Keep a healthy cash reserve.

While cash won’t earn you enough to keep up with inflation, it’s a great buffer against having to draw more out of your portfolio in uncertain times. We think about three buckets:

  • Safety. Your rainy-day reserve should be kept in cash or high-interest savings, and intended to provide a more secure backstop when the unexpected arises, targeting 6-12 months of expected expenses in retirement.
  • Income. This provides your monthly paycheck, invested in dividend and interest-generating assets that can deliver steady income.
  • Growth. This bucket grows the funds you won’t need for multiple years, can afford to take a little more risk, and is intended to refill your safety and income buckets over time.

By ensuring your cash reserve stays healthy, you can ride out periods of high inflation more successfully because you’re less likely to have to increase the amount you take from your income and growth buckets when the market is down.

4. Delay big purchases and adjust spending.

Plan out your big purchases and, if possible, delay those that are most affected by inflation. In 2022, car prices spiked, with some used cars and trucks costing a staggering 45% more over a 12-month period before falling precipitously back to a historically reasonable range. If you planned to purchase a car in 2022, you might have saved thousands of dollars by waiting a year.

We also saw some specific food items spike, including the price of eggs rising nearly 60% in 2022. If you’ve planned your retirement projections carefully and conservatively, you likely have buffer for short periods of higher spending, but if you can buy cheaper alternatives for a while, you’ll save a few bucks.

5. Review your plan regularly, especially when you’re concerned!

We can’t emphasize this enough: your advising team exists to help make sure you stay on track and improve your quality of life. We can’t take away all fears and concerns, but we are here to listen, discuss, and show how any concern impacts your plan, and suggest any changes that might be needed. In addition to your regular review, reach out during uncertain times. You’ll avoid making short-term decisions with your long-term money and, better yet, have a way to process concerns that arise along the way.

Inflation is concerning, especially in retirement, because it’s out of anyone’s individual control. But, with a comprehensive financial plan, you have the resources to put what you don’t control in terms of what you do control and help ensure that inflation doesn’t ruin your retirement.

Josh Whelan

Partner, Financial Advisor

About the Author

Josh sees his profession as a calling, not just a career. His motive for pursing financial planning was very personal. While working on a degree in marriage and family counseling, Josh’s father was diagnosed with multiple sclerosis. Josh decided then and there to change career paths to help his family prepare for an uncertain financial future. Financial planning became his path to serving others.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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