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Not a day goes by that I don’t hear or read how inflation impacts seniors – not that it doesn’t impact everyone. Many seniors have a unique perspective on what they are entitled to as evidenced by these – not unusual – Facebook comments.
“2.3% for next year Social Security is a joke. They should take into consideration, food prices, and medication. We should be getting more like 8% or maybe 9% each year.”
“Food and medicine went way up for older people and increasing Social Security is not sufficient. They need to raise the percentage to the cost of food and medicine.”
“They should be using the CPI-E.”
I happen to know the people who made these comments, they have a pension and had a good 401k as well.
It’s not like inflation should be a surprise, even that there will be periods of high inflation. Nevertheless, it seems to be a shock to many retirees and to create financial problems for them.
So, my question is, what strategy do you or will you employ to deal with inflation in retirement?
Keep 60% or more of the portfolio in stocks, wait until age 70 to start inflation-adjusted SS.
Inflation as experienced so far this century is likely a “first world” problem for most HumbleDollar folks from what I can tell. If it ever got to the point that the average HD poster actually experienced hardship due to inflation (versus annoyance, inconvenience, or worry), then the vast majority of the country would be in serious trouble.
It seems inflation is a bigger issue for more-affluent retirees, while those with less savings are better protected, because so much of their retirement income consists of inflation-linked Social Security:
https://crr.bc.edu/how-much-does-inflation-affect-retirees/
The other thing to consider for lower income retirees is that the Medicare Part B premium increase can and have wiped out the entire COLA and many times equal at least half the COLA.
Sounds logical, but the less affluent depending mostly on SS seem to be most vocal demanding higher COLAs, using the CPI-E and many I talk to are convinced the CPI- W excludes what they spend most on like food and gasoline. Of course, they are included.
Anecdotal evidence is of limited value, as I mentioned elsewhere in this thread. If we decided issues based on who whines the loudest, I’d hate to think where we’d end up.
This should help:
https://www.in2013dollars.com/us/inflation/1945?amount=1
In August 1981, Prime hit 22.75%
Are our memories that short?
I was working for a savings & loan in 1981. My branch made 3 loans that entire year for a total of $180,000. But we issued millions in 6 month CDs at 12% – 15%+. Ahh, the good old days…
Mark – I had an ARM at that time. The bank made a ton off of me and easily paid the CD interest. Those were not fun times.
My first memory of having to budget was going to McDonald’s as a kid. My parents would give my brother and me a dollar each, and we could get any combination of things under a dollar. “A burger, fries and change back from your dollar” was a thing.
This morning I spent $13 dollars for breakfast at McDonald’s.
I think part of my plan is not eating at McDonald’s. A positive flip side of that may be “eat in more”, which may take the form of inviting more friends over. Double win.
I guess the good news is between the time you were a kid and now, you have more than a dollar to spend. But I think you have a good plan. Healthier too.
My dad collected a cola protected military pension for 25 years, starting in 1954 and ending in 1979. During that time period his military pension roughly tripled due to inflation. So I knew inflation was potentially a big deal. My wife and I (independently, before we knew each other) took mid-career significant pay cuts to transition into government jobs with cola protected pensions. Now that we’re retired, we’re reaping the benefits. In my case, I wasn’t able to get into a government job until I was 49, but it still made a big difference when I retired at 65. Clearly this isn’t an option for many, but if the opportunity presents itself it is something to at least consider for younger HD readers.
I have never paid much attention to food or gas prices — they’re always going to rise over time, and I figure there’s no point in gnashing my teeth over them. If something seems too expensive at the grocery store, I buy something else. If gas is up too high, I drive less. I stopped eating out years ago, except for an occasional Arby’s.
The one thing that always concerned me deeply was the soaring cost of health insurance and out-of-pocket medical expenses, but that issue is pretty much off the table now — thank you, Medicare.
Since I don’t have the resources of most contributors here, maybe I just have my head in the sand, but to me the biggest risk of inflation is wasting time and gray hairs worrying about it too much.
The housing portion of CPI is about 36% of the total CPI index. I think for those of us trying to age in place that we are likely benefiting on our housing costs if our mortgage is paid off and we are remaining in our home compared with those subject to the full inflation impact of their housing component of the CPI. My plan is fully pay the relatively small remaining balance of my mortgage (a HELOC) in full in 2025 when I can pull the funds from my IRA and that distribution should then occur in a lower tax bracket year for us.
Like about 10% of all persons claiming SS benefits, I was able to delay claiming my SS benefit until age 70. I know that many are unable to wait to claim. I hope the SS COLA of our higher delayed SS benefit will approximate our actual personal inflation increases. Compounding works wonders.
I was also fortunate to be able to work full time until I reached age 72 and I am again working part time on a seasonal basis. While I have begun my RMDs, my part time work allows me to contribute any excess cash back to my IRA to the extent of my earned income thus effectively offsetting part of the RMD. By waiting to stop work, deferring part of my effective RMD by continued IRA contributions and by waiting to claim SS I have a shorter number years in retirement to fund, thus I expect less impact from CPI increases for us compared to many.
We have also begun buying 5 & 10 year TIPS in the bond part of our traditional IRAs and I will also be funding additional I-bond purchases with RMD distributions after 2025. I hope that I will not need to cash our I-bonds until after I have converted all the tIRAs to rIRAs that I want to convert. When the taxable Roth conversions end I plan to then begin to recognize the deferred I-bond interest. I view our I-bond holdings as part of our cash emergency fund. I expect upon selling the I-Bonds (at age 85+) we will purchase a short term taxable TIPS fund.
Once our mortgage is paid off our combined SS benefits and RMDs currently project to cover all of our expense needs and many wants, hopefully with adequate inflation protection.
Absent a poor medical event I hope that our Roth accounts will go to our adult children and we are investing our Roth’s in low cost broad base equity index funds which will have returns that hopefully exceed the CPI in the long term.
Our increasing home equity is our plan C backup to fight expected inflation and unexpected expenses and life events. Our soon to be paid off HELOC is available for eight more years and I hope that our ongoing monthly I-bond purchases and S/T TIPS taxable fund will become our safety net starting at the end of that period.
My strategy since we live on a fixed pension and social security is to have income generating assets outside a qualified plan That includes various bond funds, including municipal plus dividends from a couple of stocks. My plan is to turn reinvesting off as necessary from one or more of the funds.
Are the retirees hit hard with inflation the same ones that didn’t bother or perhaps were unable to create buckets to deal with it?
I’m thinking of a former neighbor who retired around age 50 with a public pension with cola, little or no SS, and no significant savings. Now at age 80 things are very lean for them. The wife still works part time.
I would not be surprised
Of course I have been concerned about inflation, although the recent upsurge was surprising. Every time someone here recommends a SPIA I point out that you can’t get proper inflation protection on one. I have a pension, but it doesn’t have a COLA. My, possibly inadequate, approach:
— I waited to 70 to take my own Social Security, which does have a COLA.
— I haven’t needed to tap my portfolio until reaching my mid seventies. Meanwhile, its been growing. Now I expect to start spending from it I have set up a five year CD ladder.
— My asset allocation is 50% in stock index funds.
— Before I committed to my move to a CCRC I had a fee-for-service financial planner run the numbers for me, with varied inflation projections. At a persistent 5% level I would need a Plan B, which would be a move from a two bedroom to a one bedroom apartment.
— Worst case, my CCRC promises to keep me if I run out of money “through no fault of my own”.
You have clearly put a lot of thought and planning into all this, something you don’t hear about as often as we should. I hope you never have to discuss what “ no fault of my own” means to the CCRC.
It’s been in operation for 30 years and no one has had to leave for lack of money.
I’m sort of like Rick Connor, but without the longer list. My wife has a pension without COLA – occasionally the State grants a small increase but it really isn’t a COLA. She will start FRA SS next year. I started SS at 70 last year. We bought our home 11 years ago with cash, and if I can trust Zillow it has more than doubled in value. I started drawing from my IRA a couple of years ago, mostly because I saved that money for me so I might as well use it. Instead of the 4% plan I’m currently on the 1.8% plan and always have money left over at the end of the month. Every few months, when I hit a certain value in savings I shift it to my investment account. I have plenty of room in my IRA withdrawal strategy to address inflation, and I have an investment account that I reserve for the future.
Do you have plans for the RMD level of withdrawals when they hit which start as around four percent and gradually increase?
Dick – my plan is to do more of the same. Any funds leftover after expenses will be shifted to the investment account.
My plan for dealing with inflation in retirement is to make sure I have enough money saved that I can replace at least 100% of my base salary. Although, to be safe, I think I should go with 200%. It will mean working until I’m 97 years old, but it’s not like I have anything else to do with my time. Grin.
Well, if you work to 97, you shouldn’t have to worry about inflation. 😎
Interesting question. I hear similar complaints from working age people also, so I’m not sure it’s just retirees. I don know there is a psychological difference when you go from accumulating assets (working) to decumulation (retirement). Having streams of passive incomes, but many don’t have that. I think many people struggle with the concept of inflation. I’ve heard folks wonder when prices will return to “normal”, especially since inflation had dropped significantly They struggle with the difference between deflation and reduced inflation.
Back in the 90s before there were readily available retirement calculators I helped a friend develop a detailed spreadsheet that projected retirement success or failure. He had a trad pension and SS and lots of saved assets. After playing around with the spreadsheet for a while he concluded that the key was to beat inflation by just a little bit.
Our retirement income strategy:
1) I have a trad pension, albeit with no COLA.
2) We turned on my wife’s SS, which has a COLA
3) Waiting to turn on my SS till 70 to maximize our largest source of guaranteed income with a COLA
4) We have a significant portion of our portfolio in low-dost, high quality, diversified index funds.
5) Our two homes provide a hedge against inflation. Both are in desirable areas with, at least currently, low inventory. The beach house has strong rental potential (even though this year is a bit soft).
6) Most importantly we hit life’s lottery – we have two amazing sons who married amazing women, are racing amazing families, and are very successful in their careers. We hope and plan to never be a financial burden to them, but I have no doubt they would step up if that ever became an issue.
Ah now we’re getting to the meaty stuff. This is in part why your mantra of income replacement isn’t one size fits all. Income replacement is a nice aspiration if it is entirely future proofed in terms of inflation indexed rises. But the reality is a) that can cost a lot more to “buy” and might be something the seller is unwilling to sell because of risk to them and b) just isn’t as automatic as payrises or job moves to keep pace during a working life.
IMV the answer is to be invested elsewhere. You need some element of your toolbox to be beating inflation long term to give you the capacity to shrug at it when it bites. In extremis that might be your home, particularly if it’s apt for downsizing
I’ve also tried to personally model the future rather than separately trying to guess at future inflation and investment returns by simplifying it and assuming low growth i.e. what if you beat inflation by 2%,1%, 0, -1%, -2% on average over a 20-30 year period. At -2% if you run out of pot at age 90 based on a moderate lifestyle spend but still have basic income I’d call that a pretty secure win (many might say based on stock market performance that is insanely conservative too). OK it might not take account of a 50% market drawdown next year that takes 30 years to come back but most historic periods you’d be confident of making it with considerable potential upside for legacies and/or later life care.
Are you saying that you don’t expect to live past 90? I have always projected out to 100 – I had one grandparent last that long, and another last to the mid 90s.
Absolutely no point I think for a male with possible 21st century type health issues to project much past 90 given longevity data. I know that skews if you model as a M-F couple with the probability that at least one of you makes 95.
And I model with the backup of home equity to release as almost certainly I’d need to be in some sort of care facility by then.
I’m a single female. Although I don’t know that I want to live much past 90 I consider it prudent to plan for the possibility. Dying the day you run out of money has never attracted me – too stressful.
But the reality is you don’t die when you run out of money or vice versa. I’m talking about modelling conservatively for a future from 30 years out. And 30 years in which your portfolio underperforms inflation by 2%. At which stage either you’re very esoterically invested or the world has way bigger problems that will affect our quality of life than whether we can afford the luxury bag of candy.
While pensions may not be linked to inflation, most folks don’t have pensions, as you keep reminding us, Dick. Meanwhile, Social Security does rise with inflation, and annual inflation increases are also built into the popular four percent withdrawal strategy. Thus, when a few retirees complain about inflation, should we jump to the conclusion that inflation is a bigger issue for them than for the rest of the population — or should we conclude that we’re hearing from a vocal minority?
That’s what we are doing. The 4% rule on a 60/40 asset allocation is pretty good as a starting point. It’s not that complicated. Ours is more conservative on the withdrawal rate ~2%, and a little more aggressive on the asset allocation (~65/35).
To answer Quinn’s questions in his title: For the same reason, so many people aren’t prepared for retirement.
Best I can find is that 51% of current retirees have a DB pensions while it’s about 15% for workers – public employees still are near 90%.
It may be that retirees with a pension are most vocal given few have COLAs and with a pension may have accumulated less in other assets to draw on.
Having a pension benefit and having a “significant” pension are two different animals. I have a pension for my 16 years of service at GE. It is $1000/month. No COLA. No medical care. My wife is a retired teacher with 15 years of service. $1500/month. No COLA. No medical care. I think we were in the transition stage as employers moved away from DB plans.Neither GE or the school district offer DB plans anymore. I am fortunate to have worked for private equity owned companies that paid in stock and some of those transactions were lucrative.
I think based on your previous recent threads there is decent article to bring all these things together:
i) Financial Education – How passive people are about their long term personal finance/retirement. To your post above having a “pension” is not necessarily sufficient if you don’t have other buffers.
ii) Simple rules of thumb can help but are no means perfect.
iii) Income replacement/guaranteed income alone is not sufficient if it is not inflation protected.
iv) It is very expensive to go entirely risk off in retirement and perhaps not desirable given risk is what helps you match inflation in the long run.
v) Make sure you do the self reflection about what the “non-negotiables” are in retirement (I’d argue that financially supporting adult offspring is not one except in special circumstances) and the “nice to haves”. If it’s not a non-negotiable then its easier to pass it up when constraints may tighten.
vi) Pay attention to the retirement smile etc when it comes to spending and don’t assume you’ll do the same things in your 80s as at 60
vii) Probably the most important remember your plan is yours alone and you aren’t answerable to anyone else so once you are happy with it – have the confidence to go with it. But don’t assume others are the same as you and therefore aren’t necessarily wrong in their approach. Testing and challenge is fine, pretending you have the perfect solution is almost certainly wrong because “events”.