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Americans are spending hundreds of dollars more each month due to inflation.
For those in their prime, this could mean trying to stretch an already tight retirement income.
Consumer prices jumped 8.5% in March from a year ago, according to the US Department of Labor. This includes food, which was up 1% from last month and 8.8% from a year ago, and gasoline, which was up 18.3% from February and 8.8% from a year ago. 48% compared to last March.
Housing prices have risen 5% over the past year.
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“What makes it difficult is that we face inflation, we face low interest rates and we face stock market volatility,” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“These three challenges all collide,” she added.
On the other hand, there are areas where retirees may not be as hard hit as the general population. Since personal expenses change in retirement, this lessens the impact of some rising costs, according to JP Morgan’s Guide to Retirement 2022.
“[Retirees] have more flexibility in that if fuel prices go up or airline prices go up, they can choose not to go on vacation this year,” said CFP Michael Finke, professor of wealth management at the ‘American College of Financial Services.
“Business travelers don’t have the same flexibility,” he added.
Social Security is also adjusted for inflation. Next year, seniors could get up to 8.9% cost-of-living adjustment, according to the latest estimate from the Senior Citizens League, a non-partisan senior citizens’ group. The rise for 2022 in January was 5.9%, the highest in 40 years.
With that in mind, here’s how retirees can manage inflation.
1. Wait to collect social security
The best thing older people can do to protect their incomes from inflation is to delay applying for Social Security, which, in essence, will buy more Social Security income, Finke said.
After reaching full retirement age, you can increase your benefits by 8% for each year you wait before retiring, up to age 70.
“If they wait until age 68 or 69, that’s a huge improvement in the amount of inflation-protected income they can get,” Finke said.
2. Review your budget
Factor the price hike into your budget, advises Cheng, a member of the CNBC Financial Advisor Council. This way you can see what you’re actually spending and where you may need to cut back.
For example, delaying vacations or reducing unnecessary driving can help reduce gas costs.
When shopping, that might mean buying less red meat and more chicken, or going to a farmer’s market to buy produce instead of groceries. Using coupons and price comparisons can also help you save money.
3. Keep your portfolio balanced
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Having a mix of cash, stocks, bonds and other assets is essential, Cheng said.
Cash on hand will actually help you stay invested, so you don’t have to divest yourself of assets if you need cash, she explained. However, all cash is a losing bet against inflation since the purchasing power of that cash decreases as inflation rises.
To focus on longevity so you can maintain financial independence in retirement, consider dividend-paying stocks, growth stocks and real estate, Cheng said.
“These are assets that will fluctuate in the short term, but are designed over a longer period to provide retirees with diversification and protection against inflation risk,” she said.
When it comes to dividends, focus on dividend-growing stocks rather than high-dividend ones, advises Cheng. Those with high payouts may have to cut them later, while those with rising dividends have a history of continuous increases. Look for a fund that has a basket of household names.
Also have a mix of different bonds. While it’s considered a “safe” asset compared to stocks, it also carries risk, because when interest rates rise, a bond’s price can fall, Cheng said. The Federal Reserve, which raised interest rates last month, plans six more hikes this year.
Retirees may also consider inflation-protected Treasury securities, which are issued and guaranteed by the US government like typical Treasury bonds. However, they come with inflation protection. Again, there are exchange-traded funds dedicated to TIPS.
I bonds are also an inflation hedge. Investors can purchase up to $10,000 per year, but cannot access the funds for 12 months.
Ultimately, it is important to be aware of inflation risks.
“Inflation is stealthy; it kind of surprises you,” Cheng said. “You just want to be proactive about it so it doesn’t become problematic.”
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