7 ways to deal with inflation in retirement

The news is full of stories about rising inflation. Whether it’s the prices of groceries, gas, or other goods and services we buy, inflation is definitely increasing. This was reflected in the increase in the cost of living for Social Security benefits for 2022. The increase was 5.9%, which is the largest increase in nearly 40 years.

While inflation affects everyone, it can wreak havoc on retirees, particularly those whose incomes are fixed, or at least partially fixed. Inflation is always an issue for retirees, even with more normal rates. For example, an inflation rate of 3% would halve your purchasing power over a 24-year period. For people who live longer, even a normal rate of inflation can be a problem.

Here are some ways to deal with it.

Delay applying for Social Security

If you haven’t claimed your benefits yet, you should wait and see if you have other sources of income to bridge. Each year you wait to claim beyond your full retirement age (FRA), your benefit will increase by 8% annually. The FRA for someone born in 1960 is 67 years, decreasing in two-month increments until reaching age 66 for those born between 1943 and 1954.

If you wait until the maximum eligibility age of 70, your benefit increases by 24% compared to applying at age 67. The earliest age at which you can claim your benefit is 62. The benefit reduction for people born in 1960 or later is 35%. if they claim at age 62 instead of waiting until their FRA. This is a permanent reduction.

Read MarketWatch’s Understand the Social Security column

Invest in growth

Even during more normal periods of inflation, retirees or those nearing retirement are generally advised to invest part of their portfolio in growth. Inflation is always a problem for retirees, and if you don’t invest part of your portfolio to forestall inflation, you risk running out of money when you retire.

Growth is often synonymous with stocks, and over time stocks have tended to post gains that have outpaced inflation. Growth investing can also include other types of assets, including real estate and other types of investments. Gold has often been viewed as a hedge against inflation. Investing in the actual metal involves finding a place to store it. A viable alternative could be an ETF that invests in gold.

The key is to develop an investment strategy that is a sound mix of lower-risk investments with a large enough growth component to keep you ahead of inflation.

Do you have a plan for healthcare Costs

In their 2021 survey of the cost of retirement for a married couple aged 65, Fidelity Investments estimated that this hypothetical couple would need $300,000 to cover the cost of their healthcare in retirement. This breaks down to $157,000 for a woman and $143,000 for a man. Over time, healthcare costs for retirees have outpaced inflation.

It is important for savers to factor these costs into their retirement plans. Note that the $300,000 figure does not include long-term care costs. Before you retire, research your health insurance options, including Medicare. You should also review your insurance coverage annually to ensure you have the best plan for your situation.

Open an HSA while you’re still working

For those still working and saving for retirement, open and fund an HSA (Health Savings Account) if you have access to one. HSAs allow for pre-tax contributions and after-tax withdrawals to cover a wide range of approved healthcare costs. Money deposited can be invested and rolled over to subsequent years to cover expenses such as Medicare premiums, deductibles, and expenses not covered by Medicare in retirement for a specified period (usually the end of the year, or a grace period if the employer allows). ), HSA contributions can be left in the account to be used towards future medical bills – a huge bonus for retirees. To qualify for one, you must have a high-deductible health insurance plan — one with a minimum deductible of $1,400 for an individual or $2,800 for a family.

Read: The joys of a health savings account

Consider TIPS and I-bonds

TIPs stands for Treasury Inflation Protected Securities. These are bonds issued by the Treasury whose interest rates are periodically adjusted based on the rate of inflation set by the Treasury. TIPs are issued with different maturities. There are also mutual funds and ETFs that also invest in TIPs.

Treasury I bonds pay a fixed interest rate and have a component that is adjusted twice a year according to the CPI (Consumer Price Index). The rate on new I-Bonds is 9.62% for bonds purchased through October 2022. I-Bonds don’t pay interest in cash, instead you buy them at a discount and the interest accrues, resulting in a higher value of the bond when you redeem it. Note that there is a limit to the number of I-Bonds that can be purchased in a year. They cannot be held in an IRA account or any other type of retirement account.

Read: I-Bonds are all the rage – what’s the best way to use them?

Renting versus owning your own home

One of the most common retirement decisions involves what to do with the home. It can often make sense to downsize when you retire. One question many retirees wrestle with is whether to rent or own. Both have pros and cons, and the best answer depends on each retiree’s unique circumstances.

One consideration is that when you buy a home, you won’t be exposed to increases in your monthly rental costs due to inflation. Rents have risen sharply in several areas of the country during the current wave of inflation.

Check expenses and withdrawals

It’s always important for retirees to review their withdrawal strategies and spending in retirement. In times of high inflation such as we are currently experiencing, it may make sense to reduce, at least temporarily, the amounts you take out of your various accounts if possible. It also makes sense to review your spending and see if there are any places you can save.

Inflation hurts everyone, but its effects can be particularly damaging for retirees. It is important for retirees to consider options such as B. when to apply for Social Security, how to spend and invest, and how to manage healthcare costs to minimize the impact of inflation on their retirement lifestyle. 7 ways to deal with inflation in retirement

Brian Lowry

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