Over the long run, the US averages an inflation rate of roughly three percent. For the last several years, we have been spoiled with ultra-low inflation. While warnings of higher inflation and interest rate hikes have been plenty, given the supply chain disruption, government spending, and war in Ukraine, the return of inflation isn't welcome and is concerning. As long as you don't live under a rock, I don't have to tell you that our current inflation reading is far above average.
Inflation affects each of us differently depending on the goods and services we purchase. For example, the average mortgage interest rate jump to just under 6% will have no impact on the existing fixed income mortgage locked in 1 year ago at around 3% rate or on the retirees who have already paid off their homes. The doubling of gas prices will have a larger impact for someone like me who still drives to work daily versus someone who is retired and goes less frequently. You can easily see how inflation has different impacts on each individual.
The government is keenly aware of the differences. It also calculates a broad-based way to measure inflation for individuals aged 62 and above with the CPI-E, the Consumer Price Index for the Elderly. However, your lifestyle may also be vastly different from the CPI-E index's generalizations. The best way to determine the cost of living is to examine your lifestyle and note the changes in prices to maintain that same lifestyle.
Even if your lifestyle isn't generating the latest 8.2% inflation reading or even meeting the CPI-E of 7.9%, I'm confident your expenses have increased. Here are some ways to help offset inflation during retirement.
Millions of Americans rely on Social Security as an essential source of income during retirement to pay monthly bills. As inflation increases, it gets harder to make those dollars stretch.
Just as your mom may have given you the old-fashioned Cola Syrup to help with your upset belly, the Social Security Administration provides COLA to help your monthly income when you are upset from rising prices. Social Security calculates the Cost-of-Living Adjustment on an annual basis.
You may remember, after years of small to no increases, the 2022 social security increase came in at 5.9%. Given the current inflation environment, it is expected that 2023 will see an even more significant increase. Of course, you will not see the subsequent rise until January 2023.
Investments that Adjust with Inflation
Certain investments can adjust with inflation. With interest rate payments at 9.62%, i-bonds are extremely attractive. The US Government issues government bonds that earn a fixed interest rate plus a variable interest inflation rate adjusted twice a year.
Unfortunately, I-bonds have certain purchase limits, restrictions, and tax treatments. An individual can purchase anywhere from $25 to $10,000 of i-bonds electronically in a calendar year and up to $5,000 of paper bonds with your federal tax refund. The money also cannot be touched for the first 12 months.
With the limits and restrictions, i-bonds play a limited role in your financial picture. However, at this point, every little bit helps. You can learn about i-bonds and make your electronic purchase online at treasurydirect.gov.
A Change in Lifestyle
Think back to the tricks you used when you were younger, cash was limited, and you were trying to make the dollar stretch. The COVID shut down just a few years ago offered a quick reminder of how to get back to the basics and enjoy some of the simpler things in life.
Depending on your budget, you may not have to go cold turkey and revert to the COVID lifestyle budget, but you can still cut back. When people are pessimistic about the economy, tend to spend less. Anecdotally, I see that in practice. I hear from a lot of my clients that they have already started looking at areas they can trim in the budget to save money. Going out to lunch instead of dinner, consolidating driving to accomplish the same tasks with less gas, and holding off on the luxury trip are ways to pull back without giving up on your long-term retirement goals.
How you deal with inflation is your choice. You could continue and wait for inflation to subside and your social security to increase, or you can act and implement steps to prevent inflation from tearing into your wallet and recking havoc on your retirement. This article is not a comprehensive list of ways to protect your retirement savings; it's simply a way to remind you that you have ways to combat the current inflation and stay focused on the long-term success of your retirement.
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