By Michael Russo
If you’ve been keeping up with recent news, you’ve likely noticed that high inflation and threats of a recession still dominate the headlines. And it’s not just the media painting a bleak picture. Over the past year, everyday tasks like grocery shopping, refueling your car, and routine medical appointments have all become significantly pricier, causing anxiety for those living on fixed incomes or planning to do so in the near future. With expenses mounting while incomes remain stagnant, it’s natural to feel concerned.
But is there still hope? Absolutely! Below are six actionable steps you can take to counteract the impact of inflation and shield your retirement savings for the years ahead.
Why Is Inflation 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, was 3.4% for the 12 months ending in December 2023. This is still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.
As the cost of goods rise, many retirees are left with 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 Savings?
Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.
Reassess Your Budget
The first step in overcoming inflation is to understand its impact on 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 is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run.
If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will likely be paid back with money that is worth less than it was when it was originally borrowed.
This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
Consider TIPS
Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they may not earn the highest rate of return, but your purchasing power should remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
Diversify Your Income
Retirees often have several sources of income, but they are usually relatively fixed in 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 could this improve your portfolio longevity 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:
- Invest in real estate. Owning rental properties can be a great way to earn passive income without dipping into your retirement savings.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You might earn less than what you’re making now, but these options may provide flexibility and a form of income diversification that could keep your retirement savings safe from inflation.
- Use dividend-paying stocks. Often considered an annuity-like cash stream, dividend-paying stocks give company earnings to investors, typically once a quarter. The top dividend-paying stocks even raise their payouts over time. This not only gives you an income stream, but you can also reinvest the dividends to pursue more growth.
* Neither asset allocation nor diversification guarantee against loss. They are methods used to manage risk.
Consider Alternative Investments
Alternative investments are another option in the fight against inflation. Most have low correlation with standard asset classes, which can smooth portfolio volatility. Hard assets, like real estate, timber, oil, and gold, may have an inverse relationship with stocks and bonds during periods of higher inflation. Because of these differences in behavior, including them in your portfolio may provide broader diversification, reduce risk, and increase returns.
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 could eat 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 currently paying upwards of 5% interest. Right now, that’s slightly higher than the 3.4% inflation rate and 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 the best way to improve your portfolio longevity and safeguard your retirement.
Is Your Retirement at Risk?
Concerned about your retirement with the record-high inflation rates and unpredictable market swings? You don’t have to navigate this alone. At Millstone Financial Group, we work to craft personalized plans to mitigate inflation’s impact and safeguard your retirement savings for the long term. Schedule a complimentary consultation by calling (732) 385-8544 or emailing mrusso@millstonefinancial.net.
About Mike
Michael Russo is Chief Investment Officer at Millstone Financial Group, an independent financial advisory firm helping pre-retirees and retirees pursue their retirement goals. He has 30 years of industry experience and strives to help his clients understand investments and make sure every client is presented with sound investment management philosophies and retirement distribution strategies to help reduce the chances of running out of money in retirement. Mike graduated from Montclair State University with a degree in Business Administration, majoring in Finance. He spent over 10 years working for Brown Brothers Harriman and MetLife. While working for a local financial consulting firm, Mike met Donald Albach, and together they founded Millstone Financial Group to help people navigate the complexities of planning for retirement. Mike was raised in a modest household, where family always came first. He attributes his success to both of his hardworking parents, who instilled in him core values and integrity. Mike has been married to his wife, Maryann, since 1992. They reside in Howell with their three children, Matt, Craig, and Kellie. Mike is an avid sports fan and golfer. He is also a member of Battleground Country Club and enjoys being out on the course or having dinner with good friends and clients. To learn more about Mike, connect with him on LinkedIn.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
