The news is full of stories about rising inflation. Whether
it’s the price of groceries, gasoline or other goods and services that we
purchase, inflation is definitely increasing. We saw this reflected in the cost
of living increase for Social Security benefits for 2022. The increase was 5.9%
which represents the largest increase in almost 40 years.
While inflation impacts everyone, it can have a devastating
effect on retirees, especially those whose incomes are fixed or at least
partially fixed. Inflation is always an issue for retirees even at more normal
rates. For example, a 3% rate of inflation would cut your spending power in
half over a span of 24 years. With people living longer, even a normal rate of
inflation can be an issue.
Here are some ways to deal with it.
Delay claiming Social Security
If you haven’t claimed your benefits yet, consider waiting
if you have other sources of income to tide you over. Each year that you wait
to claim over and above your Full Retirement Age (FRA), your benefit increases
by 8% annually. The FRA for someone born in 1960 is age 67, it drops in two
month increments until reaching age 66 for those born from 1943 through 1954.
Waiting until the maximum claiming age of 70 will result in
a 24% increase in your benefit versus claiming at age 67. The earliest age you
can claim your benefit is 62. The benefit reduction for someone who was born in
1960 or later is 35% if they claim at age 62 versus waiting until their FRA.
This is a permanent reduction.
Invest for growth
Even in more normal periods of inflation, it is generally
recommended that retirees or those nearing retirement invest a portion of their
portfolio for growth. Inflation is always an issue for retirees and not
investing some of your portfolio to stay ahead of inflation can put you at risk
of running out of money in retirement.
Growth often is synonymous with stocks, and over time
equities have tended to post gains in excess of inflation. Growth investing can
also include other types of assets including real estate and other types of
investments. Gold has often been considered as a hedge against inflation.
Investing in the actual metal entails finding a place to store it. A viable
alternative might be an ETF that invests in gold.
The key is to devise an investing strategy that is a solid
mix of lower risk investments with a large enough growth component to allow you
to stay ahead of inflation.
Have a plan for healthcare expenses
In their 2021 survey of the cost of retirement for a married
couple aged 65, Fidelity Investments estimated that this hypothetical couple
would need $300,000 to cover the cost of their healthcare in retirement. This
breaks down to $157,000 for a woman and $143,000 for a man. Over time, the cost
of healthcare for retirees has outpaced inflation.
It’s important for those saving for retirement to take these
costs into account as part of their retirement planning. Note the $300,000
figure does not include the cost of any long-term care needs. Be sure to look
into your options for health coverage including Medicare prior to retirement.
You should also review your coverage annually to be sure you have the best plan
in place for your situation.
Open an HSA while you’re still working
For those still working and saving for retirement, open and
fund an HSA (Health Savings Account) if you have access to one. HSAs allow for
pre-tax contributions and tax-free withdrawals to cover a wide range of
approved healthcare costs. Money contributed can be invested and carried over
to subsequent years to cover costs such as Medicare premiums, deductibles and
costs not covered by Medicare in retirement.
Unlike a Flexible Spending Account, or FSA, which is also
funded with pretax dollars but must be used by a specific deadline (usually the
end of the year, or a grace period if employers allow), HSA contributions can
remain in the account to be used for future medical bills — a huge bonus to
retirees. To qualify for one, you must
have a high-deductible health insurance plan — one with a minimum deductible of
$1,400 for an individual or $2,800 for a family.
Consider TIPs and I-bonds
TIPs stands for Treasury Inflation Protected securities.
These are bonds issued by the Treasury department whose interest rates adjust
at certain intervals based on the rate of inflation as defined by the Treasury.
TIPs are issued with a variety of maturities. There are also mutual funds and
ETFs that invest in TIPs as well.
Treasury I-bonds pay a fixed rate of interest plus have a
component that adjusts twice per year in line with the CPI (Consumer Price
Index). The rate on new I-bonds is 9.62% on bonds purchased through October of
2022. Note there are limits as to the amount of I-Bonds that can be purchased
in a year, they cannot be held in an IRA or other type of retirement
Renting versus owning a home
One of the common retirement decisions concerns what to do
about housing. It can often make sense to downsize in retirement. A question
many retirees wrestle with is whether to rent or own. There are pros and cons
to both, and the best answer will depend on each retiree’s individual
One consideration is that when purchasing a home you are not
subject to increases in your monthly rental costs due to inflation. Several
areas around the country have seen sharp increases in rents during the current
bout of inflation.
Review spending and withdrawals
It’s always important for retirees to review their
withdrawal strategies and their spending in retirement. During periods of high
inflation as we are currently experiencing, it can make sense to lower the
amount you take from your various accounts if you can, at least on a temporary
basis. It also makes sense to look at your spending and see if there are places
where you can cut back.
Inflation hurts everyone, but its impact can be especially
harmful to retirees. It’s important that retirees consider options such as when
to claim Social Security, how they spend and invest and how they deal with
healthcare expenses in order to minimize the impact of inflation on their
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