Home Guides & Resources chevron_right Retirement Beating Inflation in Retirement Published March 21, 2022 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%. Another best practice for beating back inflation in retirement is managing your portfolio accordingly. Yes, you can certainly buy inflation-indexed bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. 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 annuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). (ideally with an inflation rider) to generate guaranteed income. Regardless, we suggest fighting the tendency to become overly conservative and instead remaining invested in stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.. If all goes well, your retirement will stretch 30-plus years. The longer you benefit from the compounding interest of equitiesThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid., 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. Ask Us a Question! We’re always interested in the topics or concerns you might like us to comment on. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY. About Adviser Investments Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. 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