- When you ponder factors that can affect your financial security in retirement, don't forget about inflation.
- The Covid-19 pandemic has set changes in motion that will cause costs to rise for years to come.
- Some advanced planning can help you secure a comfortable retirement.
You've been working for a long time, and now you have started looking forward to retirement.
It takes a lot of planning, and you may or may not feel you've done enough to enjoy a comfortable, worry-free life after work.
As you consider the many factors that can affect your financial security during that long-awaited time, don't forget about inflation. The coronavirus pandemic has set changes in motion that will raise the cost of living for years to come. You can take steps now to be prepared.
It's difficult to realize how unusual the recent financial environment has been. Inflation and interest rates have been historically low.
Looking back at the last 60 years, inflation has averaged 3.7%. We have seen relatively low inflation in the recent past and based on this we have used 4% in our models. Just looking at the past 10 years, inflation has averaged 1.6%. We can count on inflation to be higher than it has the past 10 years because of the historically low inflation rates that we are seeing now.
When looking ahead to the future we should be prepared for inflation in the 4% range. Currently, I am planning for it to be between 4% and 5%.
Meanwhile, the financial markets have experienced unprecedented growth, creating seemingly strong and impervious nest eggs for retirement— even with Covid-19 shocks. Social Security continues, although the trust fund that supports it faces impending doom.
It's easy to think your retirement plan is in good shape.
For decades, it has been typical to talk about retiring with a specific sum of money. But more important than your total savings is whether its purchasing power will sustain you. Your Social Security cost-of-living increases probably won't keep pace with inflation, and your investments may be adversely affected as well. On top of all the social and economic changes to your savings, you will be primarily spending and not saving in retirement.
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Two things that have been striking over the past decade are likely to change soon: taxes and inflation. While in the short run Covid-19 has produced a surprising amount of deflation because of reduced demand for many goods, over time both taxes and inflation are expected to increase.
As people return to their normal lives, it's important to note that higher interest rates will also result in higher inflation. Unprecedented government debt points to higher interest rates in the long term, which is good if you are relying on them for income, but bad if you carry debt. Right now, the Federal Reserve predicts low rates through 2023, but the possibility of higher rates needs to be considered in any retirement planning.
It's important to recognize the radical change from zealously accumulating money to carefully spending it in retirement. Having spent most of your adult life gathering assets, now you must learn to spend them prudently. To that point, more than 50% of Americans fear outliving their money and spending their golden years working a part-time job, according to AARP. The clear solution is to recognize the potential problem and plan to avoid it.
To make a plan, determine what your assets and income are, what your taxes and other expenses are likely to be, and how you can meet those along with inevitable cost-of-living increases.
Add ways to pay for unexpected expenses and survive sudden losses in asset value. Consider a range of financial products: stocks, dividend- and interest-paying investments like bonds and preferred stocks, or an annuity that will maintain your capital over time. Many people want (or need) to continue working in their retirement years and this, too, can provide additional income.
Don't overlook a cash reserve for emergencies. Some experts recommend keeping as much as one year's expenses on hand in liquid assets. Others say three years makes more sense. In any case, even if your emergency fund is only three months' expenses, it's essential to create one.
The biggest trap to avoid in retirement is debt.
Since the Covid-19 crisis, debt among those 60 and older is up nearly 50%, according to the Federal Reserve Bank of New York. The most common debt is a mortgage, which may have been easily bearable with an income, but can become an intolerable burden in retirement.
Although there are pros and cons to carrying a mortgage in retirement, it's prudent to plan to make those payments. The tax-deductible interest isn't worth what it once was, and a large payment can soon become difficult.
Here are some other simple steps you can take now in order to possibly retire with less debt.
Do your homework and know the right time to take Social Security benefits; consider shorter-term loans; anticipate and manage your taxes; eliminate credit card debt as soon as possible; set tangible goals, knowing how much you can afford to pay toward the debt each month; and resist lifestyle inflation. In another words, as you pay down debt, avoid the urge to spend more because you have more money.
Make sure you realistically estimate your other on-going expenses. In a recent survey by Global Atlantic, nearly 40% of retirees said they're spending more than they expected.
Basically, think about the downsides of retired life and plan for them. Often a financial or retirement planner can help here, particularly in recognizing unanticipated issues.
The pandemic has changed the course of the economy this year, but will also have ripple effects for decades, leading to inflation and cost-of-living increases that could compromise your financial stability during retirement. The way to survive your retirement happily and comfortably is to plan.
Careful planning will hopefully leave you in control.
— By Jeffrey E. Bush, president of Informed Family Financial Services