This year has been unnerving for retirees because it has been a triple whammy — falling stock prices, falling bond prices and high inflation,” said Christine Benz, director of personal finance and retirement planning at Morningstar.
It’s a fact that high inflation hits hardest for people on fixed incomes—especially retirees.
How are retirees feeling these days? Despite the economic turmoil created by the pandemic, higher inflation, and volatile markets, most retirees remain remarkably confident. The latest Retirement Confidence Survey published by the Employee Benefit Research Institute finds that nearly eight in 10 are confident they will have enough money to live comfortably throughout retirement, and one in three are very confident.
Those who are less confident cite inflation as their number-one concern. That reflects the current headlines about very high inflation rates, of course, although even moderate inflation is always an important factor in retirement plans.
However, Morningstar’s Benz noted recently that actual inflation rates can differ significantly among households. As an example, for retirees, long-range healthcare costs present special challenges: historically, health care costs have risen at a higher rate than overall inflation or economic growth. In addition, long-term care costs also have accelerated faster than general inflation—at least, until the recent spike in consumer prices.
JPMorgan suggests sticking with a moderate inflation assumption of 2%-3% for your overall plan—but make a separate set of assumptions for healthcare and long-term care. “It makes sense to plan for healthcare costs at 5.5% or 6%,” Sharon Carson of JPMorgan says. “Medicare costs are rising more quickly, and you do need to plan for long-term care. But the rest of your expenses may not grow that quickly.”
So, despite the current high-inflation environment, there’s little reason to dramatically change the long-term assumptions about inflation that drive your retirement plan.
But, be aware that market declines during the first five years of retirement can have a significant effect on a financial portfolio. Remaining flexible can mitigate the damage.
Market declines that occur during the first five years of retirement can do significant and permanent damage, making it more likely a portfolio will be depleted — largely because there’s less money left intact for when the market (eventually) recovers. Interestingly, it’s less risky to experience such a decline further into retirement simply because the money no longer has to last quite as long.
That’s why financial experts suggest taking a flexible approach to withdrawals, focusing on what you can control in that moment as conditions change. Experts emphasize the importance of a conservative spending plan when a portfolio is down.
Cutting spending during down markets could give your portfolio room to recover when the markets improve. If you're able to withdraw less in down markets, that means that you could potentially take out more in up markets. The tough part about this is that we also have inflation, and that makes it very difficult for people to curtail expenses because we're seeing inflation come on strong in some nondiscretionary categories, e.g., healthcare.
In summary, if you are concerned about the impact of inflation on your retirement assets, look at cutting spending a little bit during this period as your portfolio is down; that will leave more in place to recover when the markets eventually do.
Sources: Morningstar, New York Times