Inflation Impact on Retirees

Inflation is a tax on savings. Those with the most savings will pay the most in “taxes”.

Combine that with the fact that retirees don’t have an increasing income to offset the rising costs of inflation and the “golden years” will be anything but.

Here’s what inflation in 2021 means for retirees:

  1. Modest inflation is here to stay. Be prepared.
  2. Social Security checks are automatically adjusted for inflation.
  3. Traditional fixed income may not keep up with inflation, especially in the current environment. Depending on the situation, a move toward a higher allocation of equities or real estate may be warranted.
  4. A financial planner is an exceptional investment, in financial terms and stress-reduction.

Modest Inflation is Here to Stay – Be Prepared

Inflation is the measure of the rate of rising prices in goods and services in an economy. 

When the Federal Reserve increases the amount of money at a rate higher than increases in productivity, aggregate prices will rise. This aligns with the Fed’s Monetary Policy, which targets annual inflation of 2%.

Recently, the Fed has made a major adjustment to its inflation policy: instead of targeting a 2% fixed goal, they are now pursuing a 2% average. Given the low levels of inflation over the past several years, the Fed is expected to let inflation run nearer 2.5-3% over the next few years.

Federal Reserve Chair Jerome Powell still believes this summer’s high inflation readings (3.5-5%) are temporary and will return to more normal levels in the coming months. Given the number of economists in disagreement with his diagnosis, future prices are anything but certain.

Social Security

In 1972, Congress enacted the COLA (cost-of-living adjustments) provision, automatically increasing Social Security benefits by the annual increase in the Consumer Price Index (CPI-W). The purpose is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation.

In 2020, inflation was subdued, resulting in a COLA in 2021 of 1.3%. Current projections estimate a cost-of-living adjustment as high as 6.2% in 2022.

The Game of Returns

Though their Social Security may keep pace with inflation, it’s exceedingly rare for retirees to live on Social Security alone.

Fixed income investments perform notoriously poorly in rising rate environments (like when the Fed raises interest rates to curb rising inflation). If inflation will average 2.5% for the next 10 years, why buy a 10 Year Treasury yielding 1.5%? For stability, maybe, but not for return.

Switching to 100% equities for higher returns isn’t the solution either. Taking on unnecessary risk is far from an elegant solution to protecting purchasing power. Volatility can lead to dramatic swings in asset balances – not exactly generating the stable income that most retirees are looking for.

Investing in a Financial Advisor

With so many unknowns, it’s hard to know what to do. Retirement isn’t something that should be taken lightly – you worked hard for it.

A good financial advisor will ask about your goals and take note of your personality, then develop a plan and an asset allocation based on their knowledge of you. That plan will give you the highest likelihood of reaching your established goals. Along the way, they will serve as a behavior modifier, a coach, assuring you that you are prepared.

No matter your goals, no matter the market conditions, a good financial advisor provides the confidence to sleep soundly at night knowing your future is protected.

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