That retirement scourge from another era is back. Soaring inflation, once a fixture of the 1970s and ’80s, returned with a vengeance in 2021, when prices skyrocketed 7% for the year, the highest in four decades. For retirees, inflation brings two headaches: stretching a fixed income to meet rapidly rising prices and investing a retirement savings portfolio so that it keeps pace with the higher cost of living. “The biggest fear for retirees is running out of money,” says Chris Miller, founder of the RIA South Pointe Advisors in New York City. “High inflation reduces their purchasing power and increases the likelihood that their portfolio cannot support their spending needs.”
Supply chain disruptions, a worker shortage, pentup consumer demand and government monetary policy have all conspired to keep the economy running hot, with high prices the result. Whether today’s inflation is a temporary glitch or a multiyear spike is still unclear. The Federal Reserve expects inflation will subside and range somewhere between 2.5% and 3% by the end of 2022. That’s still higher than the 1% to 2% annual rate from the past decade, and the Fed could also be wrong. If inflation is here to stay, retirees need to prepare for it.
You can start by building in a higher inflation rate for your annual spending budget. Over the past 30 years, when inflation generally hovered at about 2.5%, chartered financial consultant Michael Morgan would use 3% to pad his budget projections for clients. Now, Morgan, who is also president of TBS Retirement Planning in Hurst, Texas, is considering 4% or even 5% to help his clients plan their spending for the next 12 months. When applied across the board, a $60,000 annual budget in 2021, for example, needs to increase $2,400 in 2022 to keep pace with 4% inflation.
As part of your planning, you should forecast how much investment income you’re likely to have over the next year, based on projected returns and portfolio size. Morgan suggests that you estimate conservatively so that you don’t come up short. “If you end up earning more than expected, that gives you even more money in your budget to offset inflation,” he says.
You may also want to consider moving up your timeline for making large purchases, such as a new home or car, says Gregory W. Lawrence, a certified financial planner and founder of Lawrence Legacy Group, a retirement planning firm in Estero, Fla. “Once significant inflation gets underway, it has a ripple effect, which often lasts for years.'”
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