Strategies to Combat Inflation in Retirement Planning

The impact of inflation is felt in various aspects of everyone's lives, from grocery bills to gas prices. But have you thought about how inflation may impact your retirement planning strategy? Inflation is a longevity risk that may alter the projection of your portfolio, depending on circumstances such as Social Security, healthcare expenses, and owning a home vs. renting. Below are some facts on the impacts of inflation:

• The Social Security cost of living adjustment for 2024 is set at 3.2%, lowered from 8.7% in 2023.
• Homeowners and renters experience inflation differently. While homeowners are experiencing rising property taxes and maintenance costs, monthly payments have not significantly risen, whereas rental costs have surged. Compared to pre-pandemic levels, the price of rent is up by 21.78% as of March.

While inflation is a natural factor of a healthy economy, its effects can be challenging to navigate for individuals and families. Below are guidelines on how you can mitigate the impact of inflation on your retirement plan and portfolio.

Source: T. Rowe Price, 2024 U.S. Retirement Market Outlook

Retirees often rely on fixed sources of income, such as pensions and annuities. While these payments may provide a sense of security, they are typically not adjusted for inflation. As prices rise, the real value of these fixed incomes diminishes. This means retirees may find it increasingly challenging to cover their expenses as they age.

Social Security has an automatic cost-of-living adjustment (COLA). To maximize COLA you can delay claiming benefits and increase your monthly income. Your full retirement age is defined by the government and determines when you qualify to receive 100% of the benefit you have earned. For most this age is around 66, or 67 for those born in or later than 1960. Delayed filing after your full retirement will allow you to receive credits, whereas claiming earlier will cause reductions. Claiming at your full retirement age is worth 33% more in monthly income than a claim at 62 years old (the earliest you can claim your benefits), and a claim at age 70 is worth over 76% more.

Holding a balanced portfolio split with around 50% equities and 50% fixed income is a common asset allocation in the early years of retirement. Including equities may also help maintain your ability to spend from your portfolio, since over time equities tend to outperform inflation. The fixed income portion of the portfolio generally provides regular income, and typically offsets the performance volatility of the equity portion of the portfolio. Consider how you expect to draw down your portfolio and how this may be impacted by inflation. A safe withdrawal rate (experts advise around 4% or lower) can depend on market return after inflation and the market conditions you encounter early in retirement. Maintaining a lower burn rate than 3% while continuing to meet your living expenses with a steady Social Security income stream or pension benefit will help your portfolio endure tough market landscapes and inflation. You will also have assets available for flexible spending and charitable giving, or to pass down to your heirs.

Work with your financial advisor to ensure that your allocation policies align with the current market landscape and can withstand the future market environment. Fixed income allocations are especially important as they are a dominant default vehicle for many retirement investors since they typically provide a steady stream of income and return investment principal over time.

Treasury inflation-protected securities (TIPS) are a lower risk option if you hold them to maturity, as their principal value adjusts based on changes in the CPI. One option is asking your advisor to help stagger a portion of bonds in your portfolio that mature at regular intervals. This creates a TIPS ladder, helping to ensure that investors receive a steady, inflation-adjusted income stream that can be spent or used to purchase TIPS with longer maturity dates.

Retirement accounts like 401(k)s and IRAs offer tax advantages that can help preserve the purchasing power of savings. By taking advantage of these accounts and maximizing contributions, retirees can potentially grow their wealth more effectively.

Inflation is an inevitable force that affects everyone, but its impact can be particularly challenging for retirees living on fixed incomes. By understanding the implications of inflation and implementing proactive strategies to combat its effects, retirees can better safeguard their financial security and enjoy a more comfortable retirement. Planning ahead, diversifying investments, and staying informed are key steps in navigating the complexities of inflation and ensuring a financially stable retirement.