What Inflation Really Means for Retirees

by | Dec 16, 2021 | Investor Behavior

Seventy-one percent of investors are worried that rising inflation will hurt their retirement savings. They’re concerned inflation will erode the savings they do have, that lower interest rates will slow their savings growth, and that a resurgence of Covid-19 could further hurt their long-term financial plan.

There’s a lot of fear and worry going around right now among both retirees and those nearing retirement. In response, I want to share how inflation truly impacts retirees and how your Wealth Advisor protects your portfolio from erosion. 

The short story is this: Yes, inflation is unfortunately hurting a large number of people. But for many of our clients, inflation may be less of a concern than you think. 

How inflation affects retirees

Inflation makes everything you purchase more expensive, thereby reducing your purchasing power. It’s normal for the prices of everything from gas and groceries to cars and computers to rise slightly year over year. But 2021’s sharp inflation spike, over 6.8% as of November, is far from normal. That inflation has a ripple effect too. When everything gets more expensive, people buy less stuff, which hurts the economy in the long run. 

Inflation mainly impacts wealth stored in cash. The value of invested assets, like stocks, bonds, real estate, and commodities, tends to grow overtime. Asset growth can outpace inflation, which is why clients who stay invested over time tend to weather these seasons better. In high inflationary times like these, it’s really important to focus on your income-producing assets. 

How to protect against inflation if your portfolio is largely invested

Being invested protects you from inflation in the long run because stocks average 8-9% growth. That’s usually higher than inflation. The Federal Reserve strives to keep inflation at around 2-3%, so if you’re invested in stocks, you can expect a return that outpaces inflation and then some. Plus, you’ll get a little bit of dividend income along the way. 

How to protect against inflation if you’re on a fixed income

If you’re on a fixed income, such as from a pension, those payments may not increase alongside inflation. That creates a real financial crunch when your monthly budget no longer fits your lifestyle. While you may not be able to change your pension payments, there are other strategies that can help reduce the ill effects of inflation. 

For our clients on a fixed income, we recommend storing your wealth in both stocks and bonds. The value of bonds remains fairly steady over time while the value of your stocks tends to go up. Periodically, your Cook Wealth advisor will reallocate some of the value of those growing stocks back into bonds. That boosts your overall net worth over time, maintains your desired risk level, and offers strong protection against inflation. 

Cook Wealth’s advice for retirees worried about inflation

It’s normal to feel anxious when you see headlines declaring this the worst inflation in decades or that the value of the dollar is plummeting. But if you’re working with a Cook Wealth advisor, we’re protecting your portfolio every step of the way. 

We always come back to your original retirement goals. What do you need? What do you want? How do we need to adjust your portfolio to keep you on track? Your plan makes room for inflation and fluctuation already, but when we see that these factors may put your portfolio out of balance, we reassess. 

The good news is that on top of our efforts to keep your wealth protected, you too have the power to control your financial situation through your spending habits and streams of income. Finding new income opportunities, especially for recently retired individuals, may be the best way to keep your dream retirement intact. 

 

Do you have a quick question about your retirement plan? We’d love to help. Grab a 15-minute spot on our calendar or send us a message below. 

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