MarketWatch spoke to several financial planners wrestling with the retirement inflation challenge. One of the best new ideas in retirement is to take inflation seriously and develop a comprehensive strategy for the rise in prices:
For the last two decades, retiree Brad Hansen hasn’t worried too much about inflation and the loss of purchasing power. That’s because inflation averaged only 2.54% from 2000 to 2009 and just 1.75% from 2010 to 2019, far below the historical average of 3.10%, according to InflationData.com.
Hansen worried that if he didn’t have a plan, inflation or other economic shocks would force him into rounds of belt tightening, a search for alternative sources of income, or aggressive investing styles. He wanted to avoid the pressures and stress of trying to find sudden solutions to inflation, and instead carefully budgeted to withstand unforeseen events.
“I can live off of that money,” said Rosenthal, 43, who was recently profiled in Texas Monthly as part of a story about the Great Resignation. “But again, $80,000 is my budget.” Rosenthal did not create his plan specifically with inflation in mind. But Massi De Santis, a certified financial planner with DESMO Wealth Advisors in Austin, Texas, said now is the time to create a retirement plan that can evaluate the impact of higher-than-expected inflation.
“But a retiree’s personal inflation may be lower by 1% to 3% than headline CPI depending on retiree spending,” he said. Small changes, he said, can have a large impact over the next 25 to 30 years. De Santis added that working longer, or working part time if you’ve already retired, are two ways to reduce the ill effects inflation might have on one’s finances.
This is exactly what Hansen, the retired corporate finance executive, and his wife are doing. The lower earner claimed their benefit based on their work record, but the higher earner plans to wait until age 70 to apply for their retirement benefit. “We did the classic thing,” he said. “We started Social Security on the lower amount and then kept the second one to take later.
De Santis shares that opinion. “By all means, if you have already booked a vacation, go for it, but postpone large-ticket items for a bit if you can,” he said. “Don’t pay a premium over MSRP for a new car if you can wait to purchase one.” Meanwhile, the stock market is falling. The Standard and Poor’s 500 index was recently down about 16% for the year.
I bonds, as well as Treasury Inflation Protected Securities , and other inflation-protected bond funds should be a sizable portion of the fixed income portfolio for retirees, said De Santis. “Look for funds that offer exposure to investment-grade bonds or municipal bonds that hedge inflation with inflation swaps,” he said.
In Hansen’s case, he and his wife did review their portfolio to make sure they were in the right investments. “Are they really diversified or are they actually moving in lockstep?” he asked. In addition, Hansen is also fond of building a bond ladder. “Then I’m reinvesting if rates are up or down,” he said.
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