Retirement planning is about more than the income – it’s also about maintaining your standard of living.
The above is from Mark Miller writing in the magazine, Wealth Management.
All households, not just lower-and-middle-income earners, face the risk of a falling standard of living during retirement. Those at the lower income ranges will have a larger portion of their pre-retirement earnings replaced by Social Security. Not only are wealthier households used to a higher standard of living based on their earnings while working, but the percentage of working income that will be replaced by Social Security is less for higher earners. The maximum monthly Social Security payout for 2023 provides an income of less than $55,000 per year.
A risk that many retirees don’t think about is longevity risk. This is the risk of outliving their financial resources. People rank this risk below both stock market and inflation risk. And, this risk is higher for wealthier people simply because more of their retirement income comes from savings and investments.
Another form of longevity risk is inflation, says Joel Dickson at Vanguard. “If your portfolio going into retirement is projected to be able to satisfy your spending needs for 30 years, an inflation shock might mean that it can only do that for 27 years, and those last three years aren’t being covered,” per Dickson.
While stocks are not specifically an inflation hedge, holding equities in your retirement portfolio does offer some protection. As we have seen this past year, there are times when stocks are down while inflation is high. However, in the long term, equities have historically outpaced inflation.
Another option is TIPS, or Treasury Inflation-Protected Securities. The principal value of the bond rises and falls to keep pace with inflation and the bonds are risk free if held to maturity. A Financial Planner can help you to establish a TIPS Ladder or guide you to the right TIPS Fund. (A TIPS ladder is a portfolio of bonds that mature at regular, staggered intervals. As each matures, the proceeds can be spent or used to buy new TIPS.)
But, Social Security’s automatic Cost-of-Living-Adjustment (COLA) is the only true inflation hedge available to retirees. The COLA for 2024 is forecast to be 3.2%, below the 8.7% received for 2023 but in line with this year’s inflation rate.
One of the best ways to maximize that adjustment is to delay taking your benefits. Starting benefits at age 70 provides 76% more income monthly than if a retiree had started benefits at age 62. And, a COLA calculated against this higher figure compounds over time, resulting in an even better inflation hedge.
The 2023 Retirement Confidence Survey, conducted by the Employee Benefit Research Institute, found that only 64% of workers feel confident about their ability to live comfortably throughout retirement (down from 73% in 2022, probably due to the past year’s inflation rates and the huge market fluctuations). Among current retirees, the figures fell from 77% to 73%.
For more on how to best set yourself up for a successful retirement, please read https://www.regardingyourmoney.com/Four-Key-Objectives-of-a-Sound-Retirement-Plan.c10134.htm.
I can guide you with portfolio strategies that can help mitigate both inflation and longevity risk. Please feel free to call (215-836-4880) or email the office (ellend@regardingyourmoney.com) to set up an appointment to discuss any financial questions you may have. Or visit us at regardingyourmoney.com
Sources: The New York Times, Wealth Management