By Craig Childress, CFP®
You can’t scroll through your social media feed these days without seeing a meme about high gas prices or even the price of a dozen eggs. But what most of us are wondering is, will these high inflation rates last, and if so, how will it affect our retirement plans?
Let’s look at how inflation affects our bottom line and, more importantly, how we can keep retirement plans on course.
Why Is Inflation a Threat?
Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired.
The Consumer Price Index (CPI), which is a common measure of inflation, ended the year with an annual inflation rate of 6.5%, still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years. And the inflation rate went up another 0.5% in January, which is higher than what experts had estimated.
As the cost of goods rise, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.
What Can You Do to Safeguard Your Savings?
Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.
Reassess Your Budget
The first step in overcoming inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.
For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan.
Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run.
If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will likely be paid back with money that is worth less than it was when it was originally borrowed.
This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
Consider TIPS
Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they may not earn the highest rate of return, but your purchasing power should remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
Diversify Your Income
Retirees often have several sources of income, but they are usually relatively fixed in amount. If your expenses are greater than these income sources, you may be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only could this improve your portfolio longevity and provide you with more flexibility in retirement, but it can also help minimize the impact of inflation.
Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:
- Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You might earn less than what you’re making now, but these options may provide flexibility and a form of income diversification that could keep your retirement savings safe from inflation.
- Use dividend-paying stocks. Often considered an annuity-like cash stream, dividend-paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth.
Consider Alternative Investments
Alternative investments are another option in the fight against inflation. Most have low correlation with standard asset classes, which can smooth portfolio volatility. Hard assets, like real estate, timber, oil, and gold, may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio may provide broader diversification, reduce risk, and increase returns.
Put Idle Cash to Work
You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation could eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate.
For instance, high-yield savings accounts are currently paying upwards of 4% interest. While this is still a far cry from the 6.5% inflation rate, it is much better than the 0% interest you would earn from most checking accounts.
There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is the best way to improve your portfolio longevity and safeguard your retirement.
Is Inflation Threatening Your Retirement?
Don’t let inflation derail your plans for retirement. At Oswego Wealth Advisors, we can help you confidently pursue your ideal future. Let’s review your plan together; schedule an introductory phone call or reach out to us at 503-342-2249 or craig@oswegowealthadvisors.com.
About Craig
Craig Childress is Wealth Manager and a CERTIFIED FINANCIAL PLANNER™ professional at Oswego Wealth Advisors, an independent firm in Lake Oswego, Oregon, dedicated to helping their clients remove financial uncertainty so they can focus on what matters most. With over 35 years of experience, Craig employs a personal approach to help people find solutions to their financial needs and concerns, set goals, clarify their values, and design a plan that aligns their money with their values. He does everything with purpose and intention, and cares deeply about his clients and their families, desiring to equip and empower them to work toward financial freedom and a fulfilling life. As a Fiduciary, Craig puts his clients first, always, and provides transparent guidance that makes a significant difference in their lives. When he is not serving his clients, you can find Craig involved at River West Church, serving the community here and abroad through the Lake Oswego Rotary Club, reading, gardening, or playing his guitar. He loves spending time with his family, especially his wife, Terri, and their grown children. To learn more about Craig, connect with him on LinkedIn.
