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: 7 ways to deal with inflation in retirement

The news is full of stories about rising inflation. Whether it’s the price of groceries, gasoline or other goods and services that we purchase, inflation is definitely increasing. We saw this reflected in the cost of living increase for Social Security benefits for 2022. The increase was 5.9% which represents the largest increase in almost 40 years. 

While inflation impacts everyone, it can have a devastating effect on retirees, especially those whose incomes are fixed or at least partially fixed. Inflation is always an issue for retirees even at more normal rates. For example, a 3% rate of inflation would cut your spending power in half over a span of 24 years. With people living longer, even a normal rate of inflation can be an issue. 

Here are some ways to deal with it. 

Delay claiming Social Security 

If you haven’t claimed your benefits yet, consider waiting if you have other sources of income to tide you over. Each year that you wait to claim over and above your Full Retirement Age (FRA), your benefit increases by 8% annually. The FRA for someone born in 1960 is age 67, it drops in two month increments until reaching age 66 for those born from 1943 through 1954. 

Waiting until the maximum claiming age of 70 will result in a 24% increase in your benefit versus claiming at age 67. The earliest age you can claim your benefit is 62. The benefit reduction for someone who was born in 1960 or later is 35% if they claim at age 62 versus waiting until their FRA. This is a permanent reduction. 

Read MarketWatch’s Understanding Social Security column

Invest for growth 

Even in more normal periods of inflation, it is generally recommended that retirees or those nearing retirement invest a portion of their portfolio for growth. Inflation is always an issue for retirees and not investing some of your portfolio to stay ahead of inflation can put you at risk of running out of money in retirement. 

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

The key is to devise an investing strategy that is a solid mix of lower risk investments with a large enough growth component to allow you to stay ahead of inflation.

Have a plan for healthcare expenses 

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, the cost of healthcare for retirees has outpaced inflation. 

It’s important for those saving for retirement to take these costs into account as part of their retirement planning. Note the $300,000 figure does not include the cost of any long-term care needs. Be sure to look into your options for health coverage including Medicare prior to retirement. You should also review your coverage annually to be sure you have the best plan in place 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 contributed can be invested and carried over to subsequent years to cover costs such as Medicare premiums, deductibles and costs not covered by Medicare in retirement.Unlike a Flexible Spending Account, or FSA, which is also funded with pretax dollars but must be used by a specific deadline (usually the end of the year, or a grace period if employers allow), HSA contributions can remain in the account to be used for future medical bills — a huge bonus to 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 department whose interest rates adjust at certain intervals based on the rate of inflation as defined by the Treasury. TIPs are issued with a variety of maturities. There are also mutual funds and ETFs that invest in TIPs as well. 

Treasury I-bonds pay a fixed rate of interest plus have a component that adjusts twice per year in line with the CPI (Consumer Price Index). The rate on new I-bonds is 9.62% on bonds purchased through October of 2022. I-bonds do not pay interest in cash, but rather you buy them at a discount and interest accrues resulting in a higher value for the bond when you redeem them. Note there are limits as to the amount of I-Bonds that can be purchased in a year, they cannot be held in an IRA or other type of retirement account.  

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

Renting versus owning a home 

One of the common retirement decisions concerns what to do about housing. It can often make sense to downsize in retirement. A question many retirees wrestle with is whether to rent or own. There are pros and cons to both, and the best answer will depend on each retiree’s individual circumstances.

One consideration is that when purchasing a home you are not subject to increases in your monthly rental costs due to inflation. Several areas around the country have seen sharp increases in rents during the current bout of inflation.  

Review spending and withdrawals 

It’s always important for retirees to review their withdrawal strategies and their spending in retirement. During periods of high inflation as we are currently experiencing, it can make sense to lower the amount you take from your various accounts if you can, at least on a temporary basis. It also makes sense to look at your spending and see if there are places where you can cut back. 

Inflation hurts everyone, but its impact can be especially harmful to retirees. It’s important that retirees consider options such as when to claim Social Security, how they spend and invest and how they deal with healthcare expenses in order to minimize the impact of inflation on their retirement lifestyle. 

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