Inflation is a reality that impacts everyone. For seniors living on a fixed income, the effect could be substantial. As the price of services and goods increases, buying power lessens, making it difficult to sustain a content lifestyle.
Whether you’re preparing for retirement or already enjoying your retirement, knowing how to protect your savings from inflation is vital to maintaining your financial well-being.
Defining Inflation
Inflation means the gradual loss of buying power that is indicated by a vast rise in costs for services and goods over time. The inflation rate is estimated as the average cost increase of services and goods over one year.
Consider how the price of a loaf of bread has changed. You may remember paying less than one dollar in the past for a full loaf. Today, that same bread might cost $3–$4. That’s inflation in action, a slow cost increase over time that decreases your money’s buying power.
How Inflation Can Affect My Retirement Savings
One way to comprehend how inflation can affect your savings is to imagine putting $100 in a cookie jar for a few years. Regardless of how long you leave it in there, there will always be $100 in the cookie jar.
However, when it’s time to spend the money, you won’t be able to purchase as much with it as you could when you first put it there. Its purchasing power will decrease as inflation moves costs up. This is the effect of inflation on savings.
Strategies to Protect Your Retirement Savings Against Inflation
Calculate Your Retirement Date
If you haven’t determined when you’ll retire, calculate how much money you’ll need to cover the years when you’ve stopped working. Tools such as the Life Expectancy Calculator provided by the Social Security Administration estimate the number of years you can anticipate to live based on your date of birth and gender.
Compare this amount with your retirement savings and expected retirement income to estimate whether you’ll have enough money to last. Even if your living situation changes, you have a baseline to go by and can modify your investments as needed.
Tap Into Your Home Equity
Most U.S. real estate has appreciated dramatically in recent years. Therefore, you might want to examine a few ways to use your home’s equity to produce extra retirement cash flow that can help pay for increasing living expenses. Today’s squeeze may also give you the push you’ve needed to think about hosting your home on Airbnb, downsizing, or considering a reverse mortgage.
Assess Your Savings Withdrawal Strategies
Numerous retirees use the IRS-required minimum distribution to decide the yearly amount to withdraw from their retirement accounts and IRAs. Studies show that you can boost these amounts by up to 50% without hurting your lifelong security.
Continue Working or Seek Part-Time Work
For every month you postpone starting social security benefits or drawing down your retirement savings, your eventual retirement income will rise and it can be substantial if you can delay retirement for a year or more. If you’re already retired, every dollar of your job income helps decrease the money you’re extracting from your investments, keeping that money for later.
Deter from Carrying Too Much Cash
Everyone should have some money in personal accounts to pay for daily expenses, big purchases, and emergencies. However, as a long-term investment, cash isn’t where you want to be, particularly when the economy is facing extreme levels of inflation. As inflation occurs, you can buy fewer products and services every year with your cash.
If you have more cash than you need, think about long-term investments that can sustain your buying power over time. Financial professionals suggest creating an emergency fund that contains approximately three to six months’ worth of expenses.
Reevaluate Your Portfolio
To fight high inflation, you’ll want to invest in assets that can help you sustain your buying power over time. This will likely require having a stock-heavy portfolio, however, there are other investments, like commodities and inflation-protected bonds, that might help you remain steps ahead of inflation.
Build Your Emergency Fund
Inflation can generate unanticipated expenses. An emergency fund can work as a buffer, stopping you from having to dip into your long-term investments and possibly disturbing their growth potential. This lets compound interest work continuously, gradually increasing wealth that can help balance out the impact of inflation. Having the availability of an emergency fund could help deliver financial stability in times of unpredictability.
Stay Informed and Seek Professional Assistance
Arrange regular check-ins with a dependable financial advisor who knows the needs of seniors and retirees. They can help you evaluate your savings plan and make sure your money keeps working for you.
While inflation can be trying, seniors don’t have to deal with it ill-prepared. There are a few ways to protect their financial health including:
- Monitoring their budget
- Seeking expert advice
- Diversifying their savings
- Planning for the future
Active steps today could lead to enhanced peace of mind and stability in the future.
Think About Taking a Lump Sum
If your employer offers a traditional pension, you might be given two choices at retirement: a lump sum or monthly payments. It’s enticing to pick the monthly check, but the choice isn’t as easy as it seems.
Consider that numerous traditional pensions aren’t modified for inflation, so the purchasing power of your monthly checks will decrease over time. However, a lump sum could be invested, offering the possible capacity for growth that will keep steady with increasing costs. A market downturn, if it occurs, gives the chance to purchase stock funds and stocks at lower prices.
Interest rates are another feature to take into consideration. Lump-sum payouts are estimated according to the current value of guaranteed monthly payments, using interest rates and mortality tables issued by the IRS and revised monthly. Fundamentally, the bigger the lump sum, the lower the published rates.
Immediate Annuities
By letting you change a part of your savings into a guaranteed monthly check, immediate annuities are for retirees who might not get one from their employer. However, annuities also experience the same disadvantages as standard pension payouts in an inflationary cycle. Unless you purchase an inflation rider, which can decrease your initial payouts by over 25%, your payments won’t stay in step with the increasing cost of living.
If you invest enough in a single-premium immediate annuity to handle a good portion of your necessary expenses, you can decrease withdrawals from the rest of your portfolio during market downturns.
Moreover, since your expenses are covered, you can invest the rest of your portfolio more assertively, meaning these funds have a better chance of remaining a step ahead of inflation.
Reduce Non-Essential Costs
Reducing spending is one thing you can control to protect your retirement savings from inflation. You don’t need to change your lifestyle. You just need to create financial strategies that will work. For example, you might want to delay that European vacation or the purchase of a really expensive item.
Paying attention to your non-essential expenses is particularly critical during the early stages of retirement. If you have no problem being flexible about withdrawals during the initial phases of retirement, you can always increase them in the future.
Cut Your Taxes
Financial professionals usually say that it’s not about how much you save or make, but about how much you keep. While lessening the amount you have to hand over to the Internal Revenue is always crucial, it’s even more significant when inflation is diminishing the size of your portfolio.
If you’ve saved carefully over the years, there’s a good chance you’ve put away a good amount of money in tax-deferred accounts such as 401(k) and IRAs. It’s important to remember that the year after April 1, if you are 73, you typically must take minimum distributions from these accounts.
You’ll have to pay taxes on those withdrawals. Furthermore, if the dollar amounts are substantially large, you might be placed into a higher tax bracket.
Roth IRAs are different. If you are 59 ½ or older and have had the account for five years, withdrawals are tax-free. There are no required RMDs (required minimum distributions).
However, you have to pay taxes on all deductible contributions at your normal income tax rate. The tax bill is based on the value of your IRA at the time of conversion. For instance, let’s suppose your IRA was valued at $400,000 in January and is now worth $350,000. If you convert before your portfolio rebounds, your taxes owed will be based on the lower amount.
You don’t have to convert your whole IRA at once. You probably shouldn’t, especially if your account is huge. You’ll need to pay taxes on the conversion for the year you convert, meaning you could be placed in a higher tax bracket.
Consider converting a particular amount yearly, preferably just enough to stay within your tax bracket. Be sure you have enough money to pay the tax bill the following year.
We Can Help
As the top provider of retirement planning in Denver, Retirement Planning Resources offers expert advice on taxes, retirement strategies, financial planning, and more. Schedule a free consultation today.
Leave a Reply