Beating Inflation in Retirement

Beating Inflation in Retirement

This week’s reader question: How can I build inflation into my retirement budget?

Andrew Busa, Manager of Financial Planning, had this to say:

Fortune may favor the brave, as they say, but we also believe it disproportionately rewards the prepared. So it goes with managing inflation in retirement.

When we create retirement spending plans for clients, we build inflation into the equation. We start with a standard 2.5% increase (where inflation has been hovering for decades) and then run alternate scenarios that account for higher inflation, generally 4%–5% or more. We use these what-if scenarios to discuss how sound planning can help make up the difference when inflation threatens to erode your spending power.

For instance, maximizing your Social Security benefits is an excellent initial step. You can elect to take Social Security beginning at age 62. But if you’re in good health and plan to continue working, it usually makes sense to wait until your full retirement age (between age 66 and 67, depending on when you were born) or even beyond. Every year you delay increases your benefit by 8% over the full retirement age amount, providing an additional cushion to fund your lifestyle. Even better, that higher benefit is adjusted for inflation each year. The cost-of-living increase for Social Security in 2022 was a record 5.9%.

photo of manager of financial planning Andrew Busa and a quote stating “Fortune may favor the brave, as they say, but we also believe it disproportionately rewards the prepared. So it goes with managing inflation in retirement.”

Another best practice for beating back inflation in retirement is managing your portfolio accordingly. Yes, you can certainly buy inflation-indexed bonds like TIPS (Treasury Inflation-Protected Securities) or I bonds (Series I savings bonds), but there are limits and drawbacks to both. Or you can use annuities (ideally with an inflation rider) to generate guaranteed income. Regardless, we suggest fighting the tendency to become overly conservative and instead remaining invested in stocks. If all goes well, your retirement will stretch 30-plus years. The longer you benefit from the compounding interest of equities, the better. Staying invested in stocks will also help protect you from the effects of inflation.

Finally, be strategic with your retirement spending. Defer major purchases for a time if you are concerned about rising inflation, or consider finding a part-time job you enjoy. And remember to account for rising costs on absolute essentials like medication and other medical services, which tend to rise even faster than groceries and everyday expenses.

If you are retired or planning for retirement and are feeling nervous about rising inflation, we recommend you contact a trusted financial planner and review your plan.
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