Op-ed: Do not let inflation destroy these retirement plans
XiPhotos | E + | Getty Images
You have worked a long time and are now looking forward to retirement.
It takes a lot of planning, and you may feel like you haven’t done enough to have a comfortable and worry-free life after work.
Don’t forget about inflation when you consider the many factors that can affect your financial security over this long-awaited time. The coronavirus pandemic has set changes in motion that will increase the cost of living for years to come. You can now take steps to be prepared.
It’s hard to see how unusual the recent financial environment has been. Inflation and interest rates have been historically low.
Looking back over the past 60 years, the average inflation rate was 3.7%. We have seen relatively low inflation in the recent past and based on that we used 4% in our models. Over the past 10 years, the average inflation rate has been 1.6%. We can rest assured that inflation is higher than it has been for the past 10 years due to the historically low rates of inflation we are seeing now.
Looking ahead, we should be prepared for inflation in the region of 4%. I am currently planning a value between 4% and 5%.
Meanwhile, financial markets have seen unprecedented growth, creating seemingly strong and impermeable nest eggs for retirement – even with Covid-19 shocks. Social security remains in place despite the impending demise of the trust fund that supports it.
It’s easy to believe that your retirement plan is in good shape.
It has been typical for decades to talk about retirement with a certain sum of money. However, more important than your overall savings is whether or not purchasing power supports you. Your rising social security living costs are unlikely to keep pace with inflation, and your investments may also be negatively affected. Along with all the social and economic changes in your savings, you are primarily spending money rather than saving in retirement.
More from the FA Playbook:
The proposed bill would offer Americans a retirement plan
You don’t have to be rich to use a financial advisor
Tips from Financial Advisers to Get Your Medicare Coverage Right
Two things that have been noticed over the past decade are likely to change soon: taxes and inflation. While Covid-19 has caused surprising deflation in the short term due to lower demand for many goods, over time both taxes and inflation are expected to rise.
When people return to their normal lives, it is important to note that higher interest rates also lead to higher inflation. Unparalleled national debt suggests higher interest rates in the long run, which is good if you rely on it for income but bad if you are in debt. Currently, the Federal Reserve is forecasting low interest rates through 2023, but the possibility of higher interest rates must be considered with any retirement plan.
It is important to recognize the radical shift from eagerly accumulating money to careful spending in retirement. Now that you’ve spent most of your adult life accumulating assets, it is time to learn to spend them wisely. By then, according to the AARP, more than 50% of Americans fear surviving their money and spending their golden years part-time. The clear solution is to identify the potential problem and avoid it.
To create a plan, determine what your wealth and income are, what your taxes and other expenses are likely to be, and how to meet them along with inevitable increases in the cost of living.
Add ways to pay for unexpected expenses and weather sudden drops in value. Consider a range of financial products: stocks, dividend- and interest-paying investments like bonds and preferred stocks, or an annuity that preserves your capital over time. Many people want (or need) to continue working in their retirement years, and this, too, can generate additional income.
Don’t overlook a cash reserve for emergencies. Some experts recommend keeping expenses in cash for up to a year. Others say three years makes more sense. Even if your emergency fund only has three monthly expenses, it is definitely important to create one.
The biggest trap to avoid in retirement is debt.
According to the Federal Reserve Bank of New York, indebtedness of those over 60 has risen nearly 50% since the Covid-19 crisis. The most common debt is a mortgage, which was easy to take on an income but can become an intolerable burden in retirement.
Although there are advantages and disadvantages to carrying a retired mortgage, it is advisable to plan for these payments. Tax-deductible interest is no longer worth what it used to be, and making a large payment can soon become difficult.
Here are some other simple steps you can take now to potentially retire with less debt.
Do your homework and know the right time to get social security benefits. consider shorter term loans; Anticipate and manage your taxes; Eliminate credit card debt as soon as possible; Set specific goals and know how much you can afford to pay off debts each month. and resist lifestyle inflation. In other words, when you pay off debt, you avoid the urge to spend more because you have more money.
Make sure you are realistic about your other ongoing expenses. In a recent Global Atlantic survey, nearly 40% of retirees said they were spending more than they expected.
Basically, think about and plan for the cons of retired life. This is often where a financial or retirement planner can help, especially in spotting unexpected problems.
The pandemic changed the course of the economy this year, but it will also impact for decades, leading to inflation and the cost of living that could affect your financial stability in retirement. The way to survive your retirement happily and comfortably is to plan.
Hopefully with careful planning you are in control.
– From Jeffrey E. Bush, President of Informed Family Financial Services