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Someone on HD asked if my inflation adjusted retirement income today still equaled my base salary when I retired.
The answer is a resounding no. For every dollar of base pay in 2009 I would need $1.50 today. Since my pension does not have a COLA, any automatic adjustment is up to Social Security, but that is less than a quarter of our income.
So, now I am 50% behind – no panic yet, but I am glad I didn’t start out say, with 80% income replacement. My extreme fiscally conservative attitude on this subject provided a cushion relative to our spending. Never in thinking about retirement did I consider we might spend less – and we don’t.
Our mortgages were paid off several years before retiring and while we don’t save as much, we still save mostly in the form of eleven 529 plans, and reinvesting investment earnings
Minor items that could mean lower spending in retirement have been offset by increased retirement related spending like more grandchildren and healthcare premiums which went from $157 a month for two of us before I retired to $1654 a month today. In the place of general maintenance for our house inside and out, we have a $950 monthly HOA. Frankly I think the HOA is higher on an average annual basis.
As they say, the greatest risk in retirement is longevity.
Everyone has their own way of dealing with inflation. The 4% withdrawal strategy adjusts for inflation. I will deal with inflation when I have to by first using dividends and monthly interest payments and from cash building up in investment accounts, or in the extreme using assets I hope will go to our family.
I asked Gemini how retirees deal with inflation. Many ideas, like part-time work, cutting spending, taking a HELOC, renting a room in your home and delaying SS were not appealing. Various forms of investment income were attractive, TIPS, I Bonds and dividend stocks were mentioned as was rental income.
NJ state workers naively relied on a pension with a COLA, but because the pension fund was in terrible shape, the COLA was “temporarily” suspended. That was in 2011 and still no COLA and the trust is still underfunded. A problem created by politicians and public unions.
The point is that we all need some way to cope with inflation as we live on at least a partially fixed income. I elected to deal with it in advance and 15 years later so far so good, but for many people that may not be feasible or desirable especially if it delays retirement, so they need another strategy.
How are you dealing with or plan to deal with inflation in retirement?
One must remember the 7 most important words of a retiree: “every year everything I buy costs more“. So the enemy really is inflation. Since 1934 the Labor Dept. tells us CPI has averaged 3.4% annually. So when I follow the simple rule of 4% +3% we know why 3% was chosen. Now from 1973-1981 we had lots of inflation and it easily exceeded 3% annually.
We also know that in 1962 (one born then can retire now at reduced SS) the S&P closed at 63 and 2024 at 4,770 or a factor of 76X.
Dividends from the index in cash $2.15 and 2024 it was $70.30, or a factor of 33X.
CPI at the end of ’62 was 30—recently 307–a factor of 10 X
If equities are not a major % of your retirement portfolio then good luck trying to keep up with inflation. Of course the brown underwear years of 2000 (-9/1%)—2001 (-11.9%)—- 2008 (-37%)—covid collapse (-33%)—and 2022 (-18.1%) can ruin many a retiree.
As previously stated my value fund (90%-95% equities) with an emphasis on dividends worked nicely beginning in year 2000 with $300,000 and withdrawing 4% + 3% every year through 3/31/25. Withdrew almost $444,000 and as of March 31 the value exceeded $740,000. Remember, the 4 bear markets above during this 25-year period.
The index ran out of $ many months ago–beginning with two bad years and then 2007, 2008, early 2009 withdrawals hurt badly.
Now the money is managed by the Capital Group–I paid nothing decades ago to invest because of portfolio size–and I know someone has their nose in the air because the expense ratio is north of 55 basis points. That’s fine–same scenario with S&P 500 index shows me with close to 3/4 of a million dollars while anyone with the index has no money and little or no cost. Remember the old saying; there are people who know the cost of everything and the value of nothing.
What if I took cash dividends? $311,000+through 3/31/25 and a value north of $1.2 million. Index? $192,000 and $1.1 million ending value.
Now, it’s obvious that one can pick from Vanguard, Dodge & Cox, Fidelity, and many other fine fund families who have managed funds that in the withdrawal mode can do what folks want–many will do better than I have and have done better. Remember, my fund is basically 100% invested in equities–a few bonds and cash for withdrawal purposes no doubt.
I think I have, with my investments, beaten back the enemy which is inflation. Let’s see what happens going forward.
Herbert Stein: ” everything works until it doesn’t.”
We’re in a transitional period, and I would say there’s a Plan A and a Plan B.
Plan A is surprising me a bit. I’m retiring and he’s not. I will receive two pensions from two university systems, with COLAs, that will replace much of my income. He already gets a pension, also with a COLA, from the state agency he retired from in 2016, and he still works for a private firm. They like him and it sounds like they plan to keep him on for as long as he wants to work, so at this point, he’s saying he’ll go until 70 (he just turned 65) and then retire and take Social Security. He will also get a small pension from his current employer at that point—he vested in it when he turned 65 last month.
If that plan holds, we should be very comfortable for the next five years and there will be no need to file for SS before either of us is 70.
Plan B was the original plan before he surprised me by saying he wants to keep working for awhile: We live on our pensions and have a cash reserve to bridge us to Social Security at either 67 or 70 or some combo of the two. If he either decides he’s tired of working while I’m not(!) or his firm decides they don’t want to keep him on that long, we’ll revert back to that plan. In the meantime, I think we should build a nice cash reserve while he’s still working so we’re ready to pivot if needed. I don’t want him to feel like he has to keep working to maintain our lifestyle.
Plan C would be a combo of the two with the wrinkle that he cuts back to part time for a few years before he’s 70.
It’s mostly up to him at this point. My decisions are made.
No doubt he enjoys his work, but aren’t you guys missing out on some of the best go-go years together if he works to 70?
He works remotely and has a fair amount of flexibility. We still travel quite a bit. The one thing that’s off the table for the moment is some three-month around-the-world cruise kind of thing, but I’m not sure I’d want to do that, anyway.
…also, I don’t really believe he’ll go all the way to 70. I think he’ll watch me living my best life and get jealous. Stay tuned.
Since most folks today will not have any pension, they must focus on the growth of their pool of financial assets. Only with an increasing base of financial assets with half or more invested in the stock market can a person expect to keep up with inflation in retirement. This is the hard cold truth. You can try to dodge, or tap dance around these facts as much as you want but they will not change. That the average person might not understand equities, or other investments is a problem. The fact that there are problems doesn’t change the truth.
That is certainly true. Is managing your money and trying to grow it with investments the answer. I don’t know, but for many people maybe not.
Is an income investment strategy better that relies on dividends and interest adequate assuming that fund is separate from those relied upon for ongoing income? Again, I don’t know, but I guess it depends.
Is the 4% or less withdrawal strategy sufficient? It adjusts for inflation and if you are sure the total investment balance is adequate in theory that should do it, especially if that plus SS is total income aligned with spending.
Is how a retiree begins retirement income wise relative to working income relevant? I think so, but others downplay that idea.
The fact is that since 2009 when my pension was calculated it has lost half its buying power. On the other hand Social Security has provided a cumulative increase equal to $1.4336. That’s not too bad for a person where SS makes up a significant portion of income, but for others not so good.
There appears not to be one, but a combination of answers, but two things are for sure. One way or another inflation needs to be dealt with hopefully not by cutting spending and two, very few retirees actually live on a fixed income as is often claimed.
Without financial assets acquired before retirement, a person will not be able to buy an annuity. Dividends come from equity investments. 4% is meaningless unless there are financial assets from which one can withdraw funds. Whatever strategy might be employed is moot without financial assets.
Without pensions, people need to begin early in working careers to save and invest. SS can only provide a portion of needed income in retirement.
I have been retired since 2001. I have no pension, but I have financial assets which have grown substantially since I retired easily keeping me ahead of inflation.