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After nearly a decade of decline, inflation is on the minds of Americans.
In a recent interview on Wisconsin Public Radio, two residents of Badger State called to express their frustration with the seemingly out of control pricing and sticker shock they were taking.
Phil from Lyndon Station, Wisc., Laid out the problem succinctly. “We just sold our house for tens of thousands more than I thought the house was ever worth, [but] now we have to replace the house. He then explained how much it costs more to insure suddenly more valuable homes, not to mention the increased tax burden, and described how difficult it is to buy an affordable car.
Phil is not alone. Nearly half of Americans worry that rising prices in retirement will make basic expenses unaffordable once they stop working, according to a 2020 Allianz survey. Recent headlines on inflation, coupled with savings accounts earning next to nothing, are causing turmoil for those facing the years of fixed income to come.
But there is an interesting wrinkle to this Allianz survey: True retirees were much more optimistic about inflation than those who are still far away. For example, two-thirds of early retirees believed that inflation would jeopardize their quality of life, compared to only 40% of true retirees.
Workers today should heed this wisdom, especially as inflation attracts national attention over the summer. When it comes to retirement, inflation is simply less important than you might think.
1. Social Security is your best hedge against inflation
One of the reasons retirees worry less about inflation than their salaried compatriots is social security.
According to the Social Security Administration, about 50 million retired workers (including their dependents) received a Social Security check in December 2020, with an average monthly benefit of almost $ 1,550.
This represents almost $ 18,600 of guaranteed income per person per year, or $ 37,200 per couple. To put it in perspective: Social Security checks represent about a third of the income of all retirees. For older beneficiaries, these checks represent half of their retirement income for married couples and 70% for single people.
Not only do these monthly checks come in for as long as you live, they are also adjusted for inflation. Social Security checks receive a cost of living adjustment (COLA), which means that the amount a beneficiary receives increases when prices rise.
Social Security’s most recent COLA saw vouchers increase 1.3% from December 2020. Additionally, the COLA, which is based on the Consumer Price Index for urban workers and workers in the city. office, generally increases faster than the broader inflation rate, the CPI.
This adjustment in inflation, along with higher future monthly checks, is why experts say many would benefit from delaying their Social Security claim for as long as possible, even if you have to withdraw your 401 (k) or your IRA to do so.
2. You already own assets that beat inflation over time
A few years ago, researchers at the Boston College Center for Retirement Research looked at the wealth of a typical household headed by someone aged 55 to 64. The most important source was, unsurprisingly, future social security benefit checks (60%), followed by pension plans (17%), a primary residence (12%) and then savings in retirement plans. fiscally advantageous (5%).
While the 401 (k) is probably a more important source of money than company pension plans for young workers, the general contours remain the same: many retirees already hold assets that should hold up well in times of hardship. rising inflation.
Stock up. About half of households have a retirement account, as has been the case for several decades. About three-quarters of those savings, using Vanguard’s annual How America Saves as a proxy, are then funneled into balanced strategies, which use a healthy amount of stocks and bonds to minimize risk while maximizing gains. .
While stocks aren’t necessarily a hedge against inflation, they tend to outperform inflation over time. Inflation typically increases around 3% per year, less since the Great Recession, while stocks have generated an annual total return of around 10% over the long term, which means that even taking into account the inflation, you’re looking at around 7% average annual growth.
As Americans live longer, financial planners encourage clients to own more stocks than they have in the past to earn returns. This means that savers today should be less concerned that periods of temporary high inflation will hamper their purchasing power in the future.
Plus, according to John Rosen, an assistant professor at New Haven University, real estate tends to be an area that experiences higher demand when inflation rises. Phil of Lyndon Station, Wisc., For example, was able to sell his house above the asking price.
This is a boon for retirees who want to either take equity out of their home for renovations or those looking to downsize. Retirees can even take some of their capital gains and pay off debt, which can help reduce people’s stress about finances in retirement.
3. You will likely spend less than you think in retirement.
Certified financial planner Michael Kitces often invites young workers to imagine their retirement: what do they see themselves doing in 30 years? What will bring them joy?
Typically, Kitces says, people just extrapolate from their current tastes, even if they represent some gray hairs. For example, a 35-year-old woman avid for travel imagines that she will be in the air without stopping when she retires.
The problem is, we’re not really good at predicting what our future will like us. “If you ask people to imagine the lifestyle they want in 10, 20, 30 years,” says Kitces, “they have absolutely no idea. We think we do, but we don’t.
This so-called end-of-story illusion, as it’s called, demonstrates just how bad a job we are doing considering the things we will love once we retire. The current 35-year-old travel warrior might, once she turns 65, be less inclined to go through the rigmarole of TSA scans and pre-boarding lines.
Because of this, once people retire, says Morningstar’s David Blanchett, their spending usually goes down so much that they spend less overall, even after accounting for inflation. Part of the reason is that people tend to enter their golden years with less savings than they should and then cut spending to adjust their budgets. But even the wealthiest retirees tend to cut back on spending, perhaps because they don’t like to see their 401 (k) account balance go down.
Mike Mansfield, program director for the Aegon Center for Longevity and Retirement, says retirees often enter the last third of their lives with many of their financial issues resolved. Perhaps they have paid off their mortgage, or are on the verge of doing so, and the general level of uncertainty their younger children may have felt has waned.
Instead, they focus more on time spent with friends and family.
“They can get a better idea of how to do meaningful things in an affordable way, which isn’t filled with the same social media, FOMO pressures that would have been there when they were younger,” Mansfield said. “Rather than going to Bora Bora, they could derive more pleasure from the ritual of meeting a friend for coffee each morning.”