7 Ways To Rewrite Your Money Plan Before Inflation Rewrites It for You
No one is safe from inflation. You might have enough to retire today, but your savings won't necessarily cover tomorrow’s prices.
Approximately three-quarters (76%) of Americans ages 50 and up are worried are concerned about how inflation and rising costs will affect their retirement savings, according to a survey conducted by Western & Southern Financial Group.
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Jim Crider, certified financial planner (CFP), founder and financial advisor at Intentional Living FP, said most retirement plans have an inflation problem, as they assume prices rise steadily at 2%-3% per year.
However, he said that inflation doesn’t work that way in real life.
“Inflation comes in waves,” he said. “And with federal debt growing the way it has, we think it's wise to plan for inflation running hotter than the textbook number — at least in stretches.”
Consequently, he said it’s important to plan for a range of possibilities, instead of following one set path. Keep reading to learn seven tips to safeguard your retirement money plan from inflation.
1. Work an Extra Year or Two
“For someone 50 or older, the practical moves are less dramatic than people fear,” Crider said. “Working one or two extra years is the single most powerful lever, because it does three things at once — you save more, your portfolio compounds longer and your retirement gets shorter.”
If you don’t want to work full-time, he said even a part-time job can dramatically reduce your reliance on savings in early retirement, when withdrawals matters most.
2. Cut Recurring Expenses
Splurging on one-time expenses, such as the occasional latte or dinner out isn’t what will throw your retirement plan off track, Crider said. Instead, focus on lowering fixed costs, such as housing, vehicles or insurance, as these will save money for the rest of your life.
3. Create a Flexible Financial Plan
Work with a financial advisor to create a retirement plan that can evolve according to a number of factors, including inflation, per Kevin C. Feig, CFP and founder of Walk You To Wealth.
“Think of it like Waze — you input a destination, but the app continually reroutes you due to traffic, accidents and other unexpected events,” he said. “Your financial plan needs to adapt to your life in the same way.”
4. Invest in Assets That Outpace Inflation
“The easiest way to counter inflation is to hold assets that outpace it,” Feig said.
This could include real estate, stocks and commodities, he suggested.
“To further illustrate, recently, we've all been paying more at the pump to fill up our cars, due in part to rising tensions in the Middle East,” he said. “If you own oil as part of a broadly diversified portfolio, that position is likely experiencing an uptick as well.”
5. Delay Social Security
You might be eligible to start receiving Social Security benefits, but holding off can pay, Feig said.
For example, if you were born in 1960, you’re able to start receiving your full benefit at age 67, according to the Social Security Administration. However, if you wait until age 70 or after to start collecting, you’ll get a 24% monthly increase.
6. Don’t Create an Overly Conservative Portfolio
When people get closer to retirement, they often decrease their exposure to stocks in favor of presumably safer assets, such as bonds and annuities, said Ben S. Lies, registered Social Security analyst, and president and chief investment officer at Delphi Advisors.
“However, the only type of ‘risk’ that a more conservative portfolio hedges against is short-term volatility risk — and it actually increases other types of risk like inflation and longevity risk,” he said.
This creates a long-term risk of running out of money, because assets aren’t able to produce cash flows needed 20 or 30 years down the road, he said.
“Investors that are less worried about short-term volatility and more focused on long-term growth will do much better in times of elevated inflation,” he said.
7. Avoid Fixed Income Streams Without COLA
Fixed income streams without an imbedded cost-of-living adjustment (COLA) — i.e., annuities — don’t account for inflation, Lies said.
For example, it might seem like a good deal for a 60-year-old to buy an annuity that produces $5,000 per month for life, but it won’t hold steady, he said. Given inflation of about 3% per year, it will only cover around $2,500 worth of goods in 15 years and approximately $1,600 in expenses in 30 years.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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