DAVID HOORY CLF, LUTCF
THOSE WHO REMEMBER THE SKY-HIGH INFLATION IN THE 1970S AND 1980S HAVE BEEN HAVING AN UNSETTLING FEELING OF DEJA-VU. INFLATION, WHICH HAD AVERAGED UNDER 2% FROM 2010 TO 2020, SPIKED TO 7% IN 2021. IT WAS 6.5% IN 2022 AND 4.9% IN THE FIRST QUARTER OF 2023.
Will we again have to deal with years of hyper-inflation? Probably not. In the 1980s, the Federal Reserve learned (painfully) that even the most firmly entrenched inflation could be tamed if the Fed aggressively raised its benchmark rate. The Fed has been raising it, but has been trying not to raise it so quickly that it tips us into recession.
And because inflationary expectations can get baked in, it often takes time to bring them down. So those who are currently retired or are close to retirement will need to adjust their plans to make sure they can manage during inflationary periods.
The first step is to go over your bank and credit card statements for the past few months to see where you are spending the bulk of your money. (The top expenses for retirees tend to be housing, healthcare, transportation, and food.) Also list any major expenses you are thinking of taking on (like a new car, a European vacation, or renovating your kitchen). The second step is to start thinking of ways, large and small, to save or to delay spending.
Retirees are often advised to move to a smaller house or apartment. Remember, though, that moving can be expensive, so before you commit to a move make sure you will have lower mortgage payments (or a lower rent), lower taxes, and less maintenance. On the smaller but still significant level, see if you can continue to drive your current car for a few more years. If you cannot, consider buying a secondhand car rather than a new one. If you live in an area with good public transportation, try getting along without a car for a while. Put off that kitchen renovation if you don’t have a reasonable bid from a reputable contractor. Before you commit to a long-distance vacation, compare airfares over an extended time period, and don’t purchase the ticket until you can get an unusually good deal.
Seek out small ways to save. Combine as many errands as possible to save on gas. Carpool with a neighbor if there are gatherings you both attend. Cut back on the number of times you eat out, and do the bulk of your grocery shopping at the store with the lowest prices. Pay particular attention to food you throw away, and see if you can shop more wisely. Wait for sales before you buy clothes. And check out local thrift shops.
Keep a close eye on your income as well as your expenses. Social Security has cost-of-living adjustments, but they don’t always keep up with the inflationary challenges of individual retirees. Private pension plans often make no adjustments at all for inflation. Whether a 401(k) or IRA can keep up with inflation depends on how the money within it is invested. Stocks are far more likely than bonds or cash investments to keep up with inflation and taxes. So, make sure your retirement portfolio is diversified and that a significant amount is invested in stocks (preferably mutual funds or exchange-traded stock funds), assuming that you are comfortable with the fluctuations in these investments.
A diversified portfolio also means making sure you have some guaranteed income—no matter what. If you’re not covered by a pension plan, consider using a percentage of your retirement savings (perhaps 10% or 20%) to purchase an immediate lifetime annuity. That way, no matter what happens to the rest of your retirement portfolio, you will have some income that is guaranteed for life. An inflationary period, paradoxically, can be a good time to purchase an annuity. Interest rates will be up, and you’ll be able to lock in a payout rate that is a bit higher. Note that the annuitization period of an annuity involves payments partly representing a return of your principal, and annuities have limited liquidity.
To learn more about the information or topics discussed, please contact David Hoory at dhoory@newyorklife.com, or call him at (718)307-3400. This educational, third-party article is provided as a courtesy by David Hoory CLF, LUTCF, Managing Partner New York Life Insurance Company.
