The US is experiencing some of the highest inflation rates in decades, which can result in financial disaster for those in retirement. Inflation means fluctuations to the dollar’s purchasing power may have a significant effect on a retiree’s ability to cover costs of living and maintain a quality of life, says Kiplinger’s recent article entitled “Is Inflation Costing You More as a Retiree?”
- Disproportionate Impact on Retirees. Inflation impacts people differently. There are some who feel only a minor impact from higher rates. However, retirees tend to spend larger portions of their income on items highly impacted by inflation, such as housing, food, gas and health care, all of which are seeing the full effects.
The recent rise in prices forces a lot of retirees to address tough questions about how to protect their retirement savings, while covering their costs of living.
- Cost of Living Increases. Retirees’ sources of income may be at risk to large inflation spikes. Retiree likely have most of their income tied to markets or in fixed income. These two sources are highly impacted. Social Security does offer cost of living adjustments or COLAs, but the last increase was 5.9%, which falls short of the 8% to 9% increase in prices we’ve seen over the past year.
Retirees frequently use savings to get them through retirement. However, when inflation happens, the purchasing power of savings declines. As a result, retirees must withdraw larger amounts of savings to cover the costs of living. This shrinks the lifespan of retirement savings.
- Protect Yourself with Hedges. Inflation-protected securities can be a way to keep income on pace. Treasury Inflation-Protected Securities, commonly known as TIPS, offer an interest distribution rate that keeps pace with the CPI rates. This investment has helped many retirees mitigate inflation and maintain their quality of life throughout retirement without worrying about outliving their savings.
Retirees and their savings face a stormy forecast ahead. With fixed income, rising expenses, and little ability to earn more, retirees may need to tighten their belts even further.
Reference: Kiplinger (July 16, 2022) “Is Inflation Costing You More as a Retiree?”