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Why Is Inflation One of the Biggest Retirement Risks? Thumbnail

Why Is Inflation One of the Biggest Retirement Risks?

By Andrew J. Tapparo, MSF, RICP®

Although inflation has slowed in recent months, you’ve likely still been bombarded by scary headlines about inflation’s negative impact and the possibility of a looming recession. If only avoiding news outlets was the solution to ease your anxiety. Every time we go to the store for necessities, fill up our gas tanks, or have a routine doctor appointment, we’re faced with exponentially higher costs. For those living off a fixed income—or planning to—this no doubt increases fears and worries. It is quite a challenge not to stress when expenses keep rising but your income remains the same.

Before you’re tempted to feel that all hope is lost, rest assured there are steps you can take to combat inflation and safeguard your retirement savings for years to come. 

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, reached 9.1% in June 2022, the highest it’s been in 41 years. Though it has slowed slightly in recent months (reaching 8.5% and 8.3% in July and August), it is significantly higher than the Fed’s target rate of 2% per year.

As the cost of goods rises, 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.

1. 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 a beneficial 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 strain your finances, you can plan and make cuts to other areas of spending 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.

2. Borrow Sooner Rather Than Later

It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will 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.

3. 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 will not earn the highest rate of return, but your purchasing power will 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. 

4. 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 will be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only will this improve your portfolio longevity and provide you with more flexibility in retirement, but it will 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 will earn less than what you’re making now, but these options will provide flexibility and a form of income diversification that will 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. 

And if you are an investor who is interested in purchasing annuities to diversify your sources of income, Tapparo Capital Management offers low-cost, commission-free annuities.

5. Consider Alternative Investments

Alternative investments are another option in the fight against inflation. Most have a 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. 

6. 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 will 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 paying 2.5% interest as of October 2022. While this is still a far cry from the 8.3% 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?

Sleepless nights, runaway high inflation, and punishing market volatility aren’t exactly what you had in mind when looking forward to retirement, are they? They’re not part of anybody’s plan. And it doesn’t have to be that way. At Tapparo Capital Management, we can create a customized plan to help you minimize the impact of inflation and shield your retirement for years to come. To schedule a free, no-obligation, “Get Acquainted Call” to see if we are a good fit for each other, call 978-887-1121 or email andrew@tapparocapital.com.

About Andy

Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.

Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.

Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.