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Never Live on a Fixed Income

“I live on a fixed income” may be the six scariest words a retiree can utter as inflation flares to 40-year highs. Fortunately, with proper planning, it does not need to happen!

 How big of a bite will the current bout of inflation take out of your retirement income? There is no question that managing finances during periods of high inflation can be a challenge, especially for those who are no longer collecting a paycheck. That is why it is important that every retirement income plan includes strategies that anticipate inflation.

 Having an effective retirement income strategy that provides for regular increases in income is an important attribute of a plan that allows you to live well, and even thrive, during inflationary times.

 What Are Your Risks?

 First, it is important to understand the challenges inflation brings to retirees. Data reported for the twelve months ending in February 2022 shows that both gasoline (up 38%) and food (up 7.9%) have been big contributors to headline inflation. While these are costs we all experience, most retires don’t feel the pain to the same degree they did when they were raising families and commuting to work every day. Housing inflation (up 4.7%) may actually work to a retiree’s advantage if they decide to tap their home equity or downsize.

 On the other hand, things like travel (airline fares up 12.7%) and dining out (up 6.8%), while discretionary, will increase retirees’ cost of living. While the increase for healthcare was modest over the last twelve months (up 2.4%), retirees must plan for the reality of higher healthcare costs later in life.

 So, while retirees’ cost of living will definitely increase during inflationary periods, it will likely not go up at the near double-digit rate reported in the news.

 Battle Inflation’s Bite Of Your Income

 Everyone knows that, during a thirty-plus year retirement, there will certainly be periods of higher inflation. However, what we don’t know is when inflation spikes will occur. The solution is to build core sources of retirement income that grow every year:

At HCM our favorite inflation-fighting income strategy is to incorporate growing dividends into retirement income plans. Companies that increase their dividends every year, regardless of what stocks, bonds, inflation, and interest rates are doing, provide excellent tax-advantaged income protection.

An intelligent Social Security claiming strategy is a key element of almost every retiree’s income plan. Social Security is adjusted every year to keep up with inflation, increasing 5.9% this year.

  • Using time-segmented diversification and rebalancing strategies captures excess returns when the market rises and moves them to safer environments, allowing for the creation of income buffers that can be used when inflation spikes.
  • Bond ladders allow shorter-term maturities to be rolled into higher-yielding, longer-term maturities during periods of rising interest rates that typically accompany inflationary times.
  • Recognizing home equity as a store of value that grows during inflationary times, as a backstop for healthcare costs later in life, puts inflation on your side. It also creates an invaluable financial tool that can be used when tax-free cash flow is needed.
  • Delaying purchases (or accelerating sales) of major items that may be temporarily overpriced due to supply chain issues or extremely low interest rates is another strategy. For example, you may want to sell that extra car in the garage while used car prices are up 41.2% over the last twelve months. If you are considering selling real estate, now may be a good time. Alternatively, if you are a cash buyer of real estate, you might want to delay the purchase if you believe prices will decline as interest rates rise.

The bottom line is that living on a fixed income is a very bad idea. Fortunately, there is no reason to do it. With a little bit of planning, inflation and the natural ebbs and flows of markets may allow you to thrive during inflationary times.

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