Retirees are getting doubly squeezed by inflation and declines in their retirement savings; many pre-retirees are understandably worried as well. For many seniors, it’s a déjà vu from the 1960s and 1970s, when the United States experienced high inflation and stock market volatility.
To address this issues and shore up your retirement finances, you’ll want to manage both sides of the “magic formula for retirement security”:
I > E, or retirement income greater than your living expenses
This means seeking ways to boost your retirement income, while also reducing or containing your living expenses. Let’s look at some strategies for each side of this formula.
Boost your retirement income
Stay the course with retirement investing. Throughout the past century, over long periods of time, investment returns in the stock market have outpaced inflation. This offers a strong argument for staying invested now. And if you’ve been significantly invested in stocks for the past several years, your retirement savings should be way ahead of inflation, even considering the recent stock market decline.
The recent stock market volatility is testing our resolve to remain invested in the market, so look for ways to help you stay the course. One method is to cover most or all your basic living expenses with guaranteed sources of retirement income such as Social Security, an annuity, or a pension that won’t drop if the stock market crashes. This will help you ride out the stock market storm.
Another possibility is to shift to more income-producing stocks, such as mutual funds or ETFs that focus on corporations with consistent dividend growth. This strategy has the potential to boost your investment cashflow while reducing volatility.
Revisit your savings withdrawal strategy. Many retirees determine the annual amount to withdraw from their IRAs and 401(k) accounts by using the IRS required minimum distribution, which is a conservative withdrawal method. Research I conducted at the Stanford Center on Longevity indicates that you could increase these amounts by 25% to 50% without seriously jeopardizing your long-term security.
Invest in Series I U.S. Savings bonds, Treasury Inflation-Protected Securities (TIPs), or TIPS funds. The interest rate you earn on these investment vehicles is linked to inflation, so your savings won’t fall behind in earning power. These could be good investments for any money you currently have invested in money market funds or bank savings accounts, which still earn virtually no interest.
Consider tapping your home equity. Most U.S. real estate has appreciated significantly in recent years, so you may want to investigate several ways to use your home’s equity to generate additional retirement cashflow that could help pay for rising living expenses. Today’s squeeze might also provide the push you’ve needed to consider downsizing, exploring renting a spare bedroom, or looking into a reverse mortgage.
Keep working or work part-time. For each month you delay drawing down your retirement savings or starting Social Security benefits, your eventual retirement income will increase—and it could be significant if you can delay retirement for a year or more. Even if you’ve already retired, every dollar of working income helps reduces the money you’re withdrawing from your investments, saving that money for later.
Buy an increasing annuity. You can buy a lifetime retirement income that increases at a fixed rate, such as 2%, 3%, or 4%. This helps your income keep pace with inflation.
Manage your living expenses
Revive cost-saving strategies from the 1960s and 1970s. Remember swapping chicken for beef? Maybe the modern version is swapping any kind of meat for less expensive vegetables, lentils, rice, pasta, quinoa, and buckwheat. You might improve your health in the bargain.
There are also time-tested strategies for reducing your transportation costs. Married retired couples might be able to get by with one car instead of two, walking and biking more to get around town, car-pooling, using public transportation, or looking for other ways to drive your cars less frequently.
Manage your energy costs. If you haven’t already, look for ways to contain rising costs for heating and cooling. Examples include adding insulation, reducing cooling costs by turning down the AC and opening the windows at night, reducing heating costs by turning up the thermostat and wearing sweaters indoors, and so on.
Look for savings with your insurance premiums. If you have expensive life insurance premiums, consider whether your dependents will really need that support when you’re gone. It may be that your adult children are already on their feet and really don’t need the money. If you have substantial cash values in whole life insurance, you might be able to convert those amounts to an annuity to boost your retirement income.
For medical insurance to supplement Medicare, see if a Medicare Advantage plan can meet your needs instead of having Traditional Medicare coupled with a Medicare Supplement Plan. Of course, you’ll want to make sure that you can still obtain satisfactory medical treatment for your unique medical needs before you make any changes.
By now, you get the picture. The overall goal is to boost the money you have to spend on your true “needs,” while taking a good hard look at reducing your “wants.” We survived the 1960s and 1970s—we can do it again!