Written by Nicolas Allen CFP®
Today it’s common for Americans to spend two, three or even four decades in retirement. This means people have ample time to relax and achieve a bucket list of dreams. However, the flip side is that retirees need to ensure they have enough savings to last through their lifetime. One complicating factor is that inflation is a fact of life, and it can result in meaningfully higher expenses over time.
As you’ve likely seen in recent headlines, inflation rates are the highest they’ve been in many years. Living costs have risen 5% over the past 12 months ending in June, based on the Consumer Price Index 1 – significantly higher than the 1-2% annual increases we’ve gotten used to seeing over the past decade.
Inflation creates challenges for all consumers, but it can be particularly difficult for those who are retired and living on a limited income. Higher inflation can throw off the assumptions for regular expenses reflected in your retirement plan. It’s unknown whether this uptick in living costs will persist, but you should prepare for the impacts of inflation regardless. Here are a few things to know and do:
Keep it in perspective
Today’s inflation rate of 5% is high by recent standards, but nowhere near a record. We may be a long way from seeing an extended period of high inflation like we had in the 1970s and 1980s, where inflation in the United States peaked at 13.5%. Since 1982, inflation has only been higher than 5% in one calendar year (1991) until now.2 While another decade-long inflation threat is unlikely, living costs in the near-term may continue to rise at a fast pace.
Revisit your expenses
If the cost of essential items, such as food, gas, plus the cost of discretionary expenses, such as travel, are busting your budget, you may need to explore ways to cut back. Can you buy food in bulk to save money? Should you reduce your casual driving to cut down on gas? Are there other discretionary expenses you can forego, at least for now? Addressing these questions today could prevent you from spending down your assets too quickly.
Adjust your investments
Is your portfolio properly positioned to keep pace with inflation? It may make sense to keep a portion of your assets invested in stocks. Over the past 30 years, the Standard & Poor’s 500, a benchmark of U.S. large cap stock market performance, gained, on average, more than 10% annually3, well above the 2.3% average annual inflation rate over that same period.4 Earning higher returns on money you may need 10 to 20 years in the future should help it grow sufficiently to meet inflated income needs at that time, but a large portion of your portfolio should still be invested more conservatively to protect it from market volatility.
Look at other options to improve your position
If you are experiencing financial strains as living costs rise, you may want to consider other options, such as a part-time job or consulting. Even in retirement, it is important to be flexible to react to changing circumstances that may affect even your best-laid plans. Be sure to check with your financial advisor to discuss your most attractive options to manage today’s inflation risks.
1Source: U.S. Bureau of Labor Statistics, “Consumer Price Index Summary,” July 13, 2021.
2Source: Federal Reserve Bank of Minneapolis, “Consumer Price Index, 1913-,”
3Based on total return data from Standard & Poor’s.
4Based on the Consumer Price Index, Bureau of Labor Statistics, June 1991 through June 2021.
Nicolas Allen, CFP® is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Fresno, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 13 years. To contact him, consider http://www.ameripriseadvisors.com/nicolas.j.allen, (559) 490-7030 option 2, or 7433 N. First Street, Suite 102 Fresno, CA 93720.