How can Seniors protect themselves from the Grinch?

What We’re Experiencing

Throughout recent meetings, I asked my clients how inflation has impacted them. Not surprisingly, their prevailing answers centered around food and gasoline. One client bemoaned the fact that “what used to cost $60 at the grocery store now costs $100.” Another said they have seen an increase in prices and a decrease in portion sizes at restaurants and grocery stores. He quipped, “a cereal box is now the size of a pack of cigarettes!” While I believe inflation has facetiously distorted his view of reality, the fact remains: food prices have ticked up while sizes have shrunk. 

Additionally, record-high fuel prices are also sucking more money out of clients’ wallets. They not only feel the pain at the pump but also increased gas prices influence the shipping cost of goods. Since companies want to maintain a certain profit margin, they pass those increases along to the consumer through higher prices.

One client wondered how much his remodeling project costs would increase. Another wondered if the electric bill was going up. Others wondered if the dollars in the retirement accounts will be enough to meet future needs. Regarding his IRA, one client stated, “with the markets being down, it’s icing on the wrong cake!”

The Problem Now

Many of our clients are older and can remember what inflation was like four decades ago. However, many currently living in the US have never experienced anything like this before. It was the financial decisions of those in charge that ended up basically printing vast amounts of cash and infusing it into the economy. Essentially, saddling future generations with the problem.

Inflation means that a dollar doesn’t buy what it used to buy. This Grinch doesn’t steal Who pudding or roast beef, he eats away at wages and hard-earned investments. Just look to the 1970s to see how injurious inflation was to the American economy. Back then, the cost of money was very high and at the end of the 70s and into the 80s, folks were paying enormously high interest rates to get it – think of mortgage rates in the double digits. Consumer sentiment became more pessimistic as pressure was put on family budgets.

So, if “a dollar ain’t worth a dollar,” then there has been a diminishment of wealth across the board. It’s easy to conclude this is a form of robbery. Specifically, inflation is the theft of value.

Psychology Around Inflation

There is also a psychological problem with inflation as it relates to the law of supply and demand. If you suspect that the cost of a needed good is going up or will not be there the next time you go to the store, it may seem logical to purchase two or three of that item. (Remember, the last two years’ run-on toilet paper?) By doing so, you can drive up the inflationary pressure and by default, the price. So, should you not make multiple purchases of the same item? I’m not going to say that; it’s just another confusing aspect to consider.

What can Seniors do?

Characteristically, seniors are in the preservation or distribution phase of investing. They are either living off Social Security, pension, rental or loan income, and/or supplementing their income with investment distributions. Hence, seniors need to watch both sides of the equation: protect their income and curb expenses.

1. Hold off on Social Security:

If you are between age 62 and 70 and haven’t started Social Security payments, seriously consider delaying receiving those retirement benefits. Doing so, in essence, gets you more income later. After you reach Full Retirement Age, your delayed benefits will increase 8% per year until age 70. That guaranteed increase, along with the annual cost-of-living payment adjustments, could decrease the need for investment distributions. Which in turn, means the Grinch can’t steal as much of your nest egg.

2. Seek additional income:

Another consideration is to delay retirement and continue working. First, this ensures that investments aren’t used to cover expenses. Second, it allows more money to be invested. Finally, it makes delaying Social Security payments a reality. All-in-all, these three factors can greatly help offset the impacts of inflation. Already retired? Then, it could be worth considering a part-time or seasonal job.

3. Cut costs:

Review your budget and monthly bills to see where you can cut costs. While doing this, make sure your budget has a built-in inflation hedge of about 5% for increased expenses over the coming year. Then, determine what truly is a necessity and what is merely a want. Use your membership cards like AAA to get discounts. Reassess your Medicare coverage to get the most appropriate plan. Shop at warehouses like Costco or BJ’s. Contact your cable, wireless, and utility companies to see if there is a better deal for you. Review monthly subscription fees to see if you’re getting the most bang for your buck. If you’re disciplined, use a generous cash-back credit card for your purchases and then pay off the balance every month.

4. Buy now:

This might sound counterintuitive to cutting costs but consider moving your timeline up for major needed purchases like a house or car. This is because there is often a ripple effect lasting months or longer with the type of inflation we’re seeing. Meaning, buying that necessary major purchase now could potentially save you hundreds or thousands of dollars compared to waiting to buy until later this year.

5. Talk with a financial expert:

Often there are adjustments that can be made in financial plans to account for inflation. Regardless of the current situation, if you’re in your sixties, you’re likely to live a good two to three more decades. Your assets need to be allocated to handle current expenses and distributions, as well as outpace inflation over the long run. An appropriate mix of cash, bonds, and stocks can do just that. Working with a fee-only advisor who takes a holistic approach to your financial life can help you with appropriate investment choices and provide needed advice on your situation.

What’s Next?

All this to say, the real question is: will prices ever really come back down? Or put another way, how will inflation play out in the coming years? To answer this, we need to take a step back to look at the history and political factors which opened the door and rolled out the red carpet for the Grinch. Stay tuned. The next blog of this series will discuss these factors.

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