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Shield Your Retirement Savings Against Inflation With These Tips

Shield Your Retirement Savings Against Inflation With These Tips

It’s no surprise that inflation is impacting our everyday lives. From buying groceries to filling up our gas tanks, everything is getting more and more expensive. A dollar today isn’t going to be worth the same as a dollar tomorrow. 

Not only does inflation impact our daily purchases, but it also can impact your retirement savings. So, is all hope lost? Certainly not! Below are 5 steps you can take to combat inflation and safeguard your retirement savings for years to come.

How Inflation Is a Threat

Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired. 

The Consumer Price Index (CPI), which is a common measure of inflation, ended the year with an annual inflation rate of 6.5%, quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.

Unfortunately, many retirees live off a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.

What Can You Do to Safeguard Your Retirement Savings?

Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.

1. Generate Multiple Streams of Retirement Income

Retirees often have several sources of income, but they are usually a relatively fixed amount. If your expenses are greater than these income sources, you may be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only can this improve your portfolio longevity through retirement income planning and provide you with more flexibility in retirement, but it can also help minimize the impact of inflation.

Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:  

  • Strategize your Social Security income. Know what options are available to you. If you are married, additional strategies may be available. (See our upcoming article.)
  • Allocate your current investments to provide multiple streams of income. Consider annuity income, but be careful! It’s best to work with a professional in order to find an appropriate fit for your needs and situation.
  • Continue to earn income, even part-time. You could pursue a passion, become a freelancer, or work for a nonprofit. You may earn less than what you’re making now, but these options can provide flexibility and a form of income diversification that can keep your retirement savings safe from inflation.

2. Put Idle Cash to Work

You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation eats away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate. 

For instance, high-yield savings accounts are paying 2.5% interest as of October 2022. While this is still a far cry from the 8.3% inflation rate, it is much better than the 0% interest you would earn from most checking accounts. 

There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is a good way to improve your portfolio longevity and safeguard your retirement.

3. Invest in Equities

It’s important to keep a portion of your portfolio invested in equities according to your risk tolerance and time horizon. Historically, equities tend to beat inflation over the long term. It’s probably best to work with a professional to be sure your portfolio remains within your individual risk profile, especially during times of high inflation.

4. Focus on Cash Flow

If you are already retired, it’s important to focus on cash flow and not bending over backwards to try to eke out another percent or two of return, often with greater risk. Having enough cash flow to cover your expenses should help to minimize unplanned portfolio withdrawals.

5. Reassess Your Budget

Finally, and perhaps most importantly, is to have a good understanding of your expenses and how inflation can impact your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.

For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan. 

Reassessing your budget can be a beneficial tactic at any time, but especially so when the market is in a downturn. The more you can avoid unplanned withdrawals from your portfolio to pay for everyday expenses, the better off you should be in the long run.

Is Inflation Threatening Your Retirement?

Are you worried about your retirement amidst historically high inflation and extreme market volatility? If so, we can help! At Tranquility Path Investment Advisors, we approach retirement income planning differently than other advisors. We focus on the distribution phase of your retirement, not just the accumulation phase. The rules for retirement income planning are complex and sometimes burdensome, but we can help. Schedule an introductory meeting online or reach us at (732) 856-4324.

About Oscar

Oscar Casas is the chief executive officer at Tranquility Path Investment Advisors, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. Oscar has over a decade of experience helping clients plan for a confident retirement. He is known for being an empathetic and compassionate listener and for prioritizing his clients’ needs and goals above all else. He acts as a coach, advising his pre-retiree and retiree clients through all the ups and downs on their financial journey. He loves that he has the opportunity to make a difference in people’s lives and take some of the stress off their shoulders. 

Oscar has a bachelor’s degree in finance, a master’s degree in personal financial planning, and is a CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, Master Planner Advanced StudiesSM and Accredited Behavioral Finance Professional℠ professional.  When he’s not working, you can find him enjoying the outdoors with his three children. He is an avid tennis player who also loves golf, the beach, snowboarding, traveling, and volunteering with the Scouts.

About the Author

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