For retirees, rising inflation can present financial challenges. Attorney Lyle Solomon outlines four key steps for managing retirement amid rising inflation.
For retirees, rising inflation can present financial challenges. By raising prices, inflation lowers the purchasing power of your savings. When choosing your retirement income strategy, it is crucial to account for higher inflation, as it is often unpredictable.
You might run out of money if your living costs increase faster than the income your retirement savings can sustainably produce. Determining how long inflation will last can be challenging. Historically, inflation has fluctuated over time.
However, there are steps you can take to mitigate the adverse effects of inflation.
By taking action now, you’ll be able to continue living off your retirement savings and income for years to come.
Here, I outline four key steps for managing retirement amid rising inflation.
What is Inflation and How Does it Affect Your Retirement?
Inflation is a rise in the prices of goods and services over time.
Your retirement financial plan could be negatively affected if you need to withdraw more from your retirement assets because inflation has driven up prices and reduced your purchasing power.
The gap between your monthly income and your monthly bills could change over time as prices rise.
Temporary increases in inflation, such as what we’re experiencing now, can be alarming, especially if they haven’t occurred in a while.
That’s why planning for potential short-term increases in inflation is a key component of a retirement strategy.
Four Key Steps for Managing Retirement Amid Rising Inflation
1. Analyze your budget
Review your bank and credit card statements from the previous three to six months to get a comprehensive view of your expenses, both day to day and longer term.
Then, compile a list of all expenses to determine your monthly payments.
If your spending has been increasing over the past few months, assess the growth over time. This helps you understand how inflation has changed the overall amount of your payments.Â
Next, carefully review your fixed and variable expenses.
From month to month, fixed costs typically remain stable. Your utilities, phone bill, cable bill, rent or mortgage, and insurance costs all fall under the fixed-cost category.Â
Your variable expenses are those that aren’t fixed, such as the amount you spend on groceries, dining out, entertainment, hobbies, travel, etc.
Understand the current situation by determining whether you’re positive or negative each month based on your income minus your expenses.
A wise move is to review your variable expenses to identify opportunities to save money.Â
If you’re positive each month (have money left over after paying expenses), you might put that amount toward paying off high-interest debts or toward a savings account for emergencies.
Another option is to explore payday loan debt relief or other debt relief options for any other debt you have.
High-interest debts like payday loans can severely affect your retirement funds, so you should take advantage of any opportunity to pay them down and get rid of them.
2. Invest in stocks
Historically, annual stock returns have been significantly higher than inflation rates.
Because of this, owning stocks in your retirement portfolio is one of the best strategies you can use to safeguard your funds against long-term inflation.
However, while stock investments offer better long-term returns, they also carry greater short-term risk.
Typically, portfolios allocate a portion of your funds to bonds, which generate income more consistently, to help offset short-term market risk.
But bonds might not be able to counteract inflation, especially when interest rates are low.
Check your portfolio to see if it has the right mix of assets in light of shifting market conditions and make adjustments to balance risk vs protect against inflation.
3. Have an emergency fund in place
Whenever possible, maintain an emergency fund or financial reserve to tide you over during challenging economic times.
Holding some cash rather than investing everything in stocks or bonds means you can use it as a cushion to pay expenses when costs have increased.
This is especially helpful when periods of inflation coincide with drops in the market value of your investments.
4. Consider the effects of inflation during regular updates to your financial plan
An accurate projection of your actual spending is necessary for an effective retirement plan.
Your retirement plan will need to be adjusted over time due to changes in market conditions, inflation, or your specific needs.
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Guest contributor Lyle Solomon has extensive legal experience and in-depth knowledge of consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently serves as a Principal Attorney at Oak View Law Group in California.
