Is Inflation Eroding Your Retirement?

Despite your best efforts, inflation gnaws away at retirement benefits like chronic, incurable sickness and eroding retirement benefits that often fail to keep pace with the growing cost of living. Inflation’s impact on a family’s savings is taboo for many households since it presents the dreadful possibility of outliving their resources. This year, no American, whatever age, can ignore it. Currently, the U.S. inflation rate is at its highest level in approximately three decades, with annual consumer price growth of 6.2% through October.

As a licensed financial planner and chief executive officer of Blue Ocean Global Wealth in Gaithersburg, Maryland, Marguerite Cheng has tried to safeguard her mother, Eileen’s 75-year-old nest fund, against continuous price hikes. Paul, her late father, escaped Communist China as a youngster and forged a profitable career with IBM, amassing a pension, life insurance policies, and careful savings.

Despite a recent cost-of-living adjustment of 5.9 percent, the biggest in forty years, price hikes significantly impact current Social Security income. According to Senior Citizens League analyst Mary Johnson, inflation has “severely undermined” the purchasing power of these benefits this year.

Ms. Johnson discovered, based on an analysis of national consumer pricing data through July, an increasing gulf between increases for 39 recurring costs affecting individuals over 65 — Medicare premiums and prescription medicines among the fastest-rising — and the cost of living adjustment for Social Security.

Medicare Part B (which covers doctor’s visits) premiums will increase by 14.5% in 2022, one of the most significant increases in the program’s history; the government revealed last week. This will increase the basic monthly premium from $148.50 to $170.10 per month.

In a recent poll conducted by the Senior Citizens League, 44% of Medicare users reported monthly health care costs between $160 and $495. Given that the average monthly Social Security payout is around $1,487, Ms. Johnson said, that’s a considerable chunk of income.

These results are especially problematic considering that she noted almost 46 percent of our survey respondents also reported having no retirement savings.

Over the previous 21 years, COLAs have increased Social Security payments by 55%, but housing expenses and health care expenditures have increased by 118% and 145%, respectively, Ms. Johnson said. COLAs are designed to safeguard the purchasing power of Social Security payments. Still, according to consumer pricing statistics through July 2021, Social Security payouts have lost 32 percent of their purchasing power since 2000.

How to mitigate price hikes

It is challenging to keep up with these growing expenditures with traditional retirement benefits. While Social Security payouts are tied to the Consumer Price Index, increases in Medicare premiums and other medical spending reduce the cost-of-living adjustment. Therefore, unless you prepare ahead, it is impossible to keep up with the actual expense of health care in retirement.

You will hear it again, as you have in the past. Maximize your Social Security benefits by delaying your retirement. This necessitates waiting as long as possible, preferably until age 70, before receiving payments. When you receive benefits, your monthly payments will be increased and supplemented by yearly cost-of-living percentage changes.

The financial advisor, Ms. Cheng, emphasized the need to maximize Social Security benefits, ensuring married couples get the highest survivor benefit.

Keep a close check on your expenditures before and after retirement. Combine this attentiveness with a vigorous savings strategy. And it is impossible to overestimate the significance of paying off debt and avoiding new borrowing.

Amy Braun-Bostich, a certified financial planner at Braun-Bostich Associates in Canonsburg, Pennsylvania, said, get your costs under control before retirement.

Do some homework. Using internet calculators, estimate your anticipated retirement income. How much will your monthly income be after taxes, recurring medical expenditures, and living expenses?

It is prudent to anticipate overall post-retirement health care expenditures, including dental, vision, Medicare supplementary insurance (also known as Medigap), and Part D plans, which cover prescription medicines.

Ms. Braun-Bostich said that most retirees do not comprehend the effect of medical expenses on their buying power over the next ten to twenty years. She suggests that those with high-deductible employer-sponsored health insurance contribute to health savings accounts to solve this problem. They may cover a variety of out-of-pocket medical bills. Contributions and withdrawals are tax-free if utilized for qualified expenses. You may also use the earnings to augment your retirement income, but non-medical withdrawals are taxable.

You may contribute up to $3,600 for a “self-only” HSA in 2021 and $7,200 for a family plan. These restrictions will increase to $3,650 and $7,300 in 2022. If you are above 55, you may contribute an extra $1,000 yearly as a catch-up payment.

Consider the long-term care expenditures. Ms. Cheng supplemented her mother’s investment account with hedges against inflation. In 2000, she advised her parents to get long-term care insurance, which may cover care in an assisted living facility, nursing home, or home. At the time, she suggested measures that would increase benefits at a basic interest rate of 5 percent for her father and 5 percent for her mother. The insurance provides a daily payment of $125 and inflation protection of 5%.

Her mother purchased variable annuities with inflation-adjusted “living benefits” riders, which guarantee a payment while the client is still alive, upon her father’s death in 2015. Ms. Cheng said we did not put all Mom’s money into this product.” We only invested a portion of her IRA and her inherited IRA in addressing market risk, inflation risk, and longevity. (These additional contracts are often costly, and extra features increase the cost of an annuity contract. The living benefits rider added 1.35 percentage points to the contract’s purchase price for Ms. Cheng’s mother.)

Invest and save. This is obvious, yet it deserves repetition. Low-cost, diversified, no-commission stock-index mutual funds are a second reliable strategy to enhance retirement savings. Utilize a cost estimator to see how much you may save.

Ms. Braun-Bostich advised, “Save as much as possible” in 401(k), Roth I.R.A., and HSA accounts. Ensure your retirement portfolio’s diversification and safety by including Treasury Inflation-Protected Securities (also known as TIPS), short-term bonds, floating-rate securities, and U.S. and overseas equities. In addition, if you already have such a portfolio, you should yearly review your development.

Ms. Braun-Bostich said, “This is not a one-and-done occurrence.”

And keep in mind that life delivers curveballs. When it comes to inflation, looks may be misleading since single-digit, short-term gains seem to be relatively modest. Even while consumer prices decreased during the initial wave of the epidemic, they increased this year when companies reopened, extensive supply chain concerns arose, and more individuals returned to work.

The Consumer Price Index climbed 4.6% in October, the most significant annual gain since 1990. This contrasts with an average of around 3 percent between 1913 and 2020, with substantial spikes during the 1970s (7.25 percent) and 1980s (5.75 percent). Regardless of your perspective on inflation, you will need to cushion the cost of living and unanticipated pre-retirement financial shocks like job loss, divorce, and out-of-pocket medical bills, which make retirement planning much more difficult. A survey conducted by the National Endowment for Financial Education revealed that by age 70, 96% of Americans had suffered four or more “income shocks.”

How can you escape the triple danger of inflation, income volatility, and outliving your savings? Ms. Johnson recommended working with a fiduciary fee-only certified financial planner who can diversify your retirement portfolio with low-cost index funds. This planner will charge a fixed or hourly fee depending on the required labor. Commission-based financial advisors, brokers, and agents should be avoided.

It is shown that every action provides a feeling of empowerment. “Start planning when you’re young,” suggested Eileen Cheng. Everything is eligible for a loan except retirement.