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Strategies for Financial Stability & Retirement Security
Back in 2014, a McDonald’s hash brown cost about $0.89. Today, the price is around $3.29. This 270% increase equates to an annualized inflation rate of approximately 13.9%. This simple example illustrates why inflation is often called “the silent retirement killer.” With each uptick in the Consumer Price Index (CPI) and every passing day, future financial security and purchasing power are eroded.
Recent reports from the Bureau of Labor Statistics highlight the ongoing challenges posed by inflation. While the June 2024 Consumer Price Index showed a decline of 0.1% on a seasonally adjusted basis, the changes over the last six months have varied, with monthly increases of 0.2% to 0.4% and an overall rise of 3.0% over the past year. While these figures might seem moderate, their long-term implications are significant. Persistent inflation can erode the purchasing power of individuals, particularly those who are in or nearing retirement.
Understanding the Impact of Inflation on Your Retirement Savings
As illustrated above, one of the most immediate consequences of inflation that we’ve all felt is the increased cost of goods and services, which translates into a higher cost of living. As everyday items become more expensive, discretionary income dwindles, leaving you with less money to allocate towards your savings and retirement accounts - and most important, enjoyable activities for you and your family. This erosion of purchasing power can derail even the most carefully laid financial plans, forcing you to make significant adjustments to your lifestyle. The first step to combatting this often comes down to the personal choices we make on a day-to-day basis. For instance, I had a recent conversation with someone who expressed concern that her grocery bill at Whole Foods had nearly doubled over the last year. While Whole Foods offers high-quality products, it isn't the best place to shop if you're looking to combat inflation. Opting for more budget-friendly grocery stores and making conscious spending decisions can significantly impact your overall budget. It’s not uncommon for our more frugally-minded clients to put more effort into searching for deals on goods and services during times of high inflation and / or poor market returns.
So, What Steps Can You Take to Secure Your Retirement?
In addition to making smarter choices with your spending, there are several proactive steps you can take to mitigate the impact of inflation on your financial future. Consider the following:
Diversify Your Investments: Reassess your investment strategy to diversify, spreading your investments across different asset classes, such as stocks, bonds, real estate, and commodities. Diversification helps mitigate risks associated with any single asset class and can provide a hedge against inflation. Stocks, for example, have historically outpaced inflation over the long term, while real estate and commodities like gold can offer additional protection.
Increase Your Savings Rate: Boost your savings to build a larger nest egg that can better withstand the impact of rising living costs. Consider allocating more of your income towards retirement accounts such as 401(k)s or IRAs. Automating your savings can also ensure consistent contributions and help you take advantage of compound growth over time.
Consider Investing in Short-Term Treasury Bonds: Short-term treasury bonds are a prudent investment during times of inflation due to their lower interest rate risk, capital preservation, liquidity, and regular income. During inflation, rising interest rates often cause the prices of long-term bonds to fall significantly. We saw this impact bond mutual funds (which we had largely sold off) throughout 2022. Short-term bonds, backed by the U.S. government, are less affected by these price declines because they mature more quickly, typically ranging from a few months to a few years, and can be reinvested at higher interest rates. This shorter maturity makes them less sensitive to interest rate fluctuations compared to long-term bonds.
Reduce Your Debt and Keep Low Interest Rate Debt: Pay off high-interest debt to reduce your financial obligations and increase your disposable income. Prioritize paying down credit card balances, personal loans, and other high-interest debt, especially debts that have floating interest rates in order to free up more money for savings and investments. Lower debt levels also reduce financial stress and increase your overall financial flexibility.
Consider Alternative Income Streams: Look into creating additional income streams, such as part-time work, consulting, or rental income, to supplement your retirement savings. If you pursue rental income, be sure to take advantage of Qualified Business Income (QBI) deductions to maximize your tax benefits if possible. For more details on QBI deductions, refer to our previous article: “Rent Smart: Leveraging QBI to Reduce Your Taxes.” These can provide a buffer against inflation and help maintain your standard of living without relying solely on your retirement funds.
Reevaluate Your Retirement Plans: Regularly review and adjust your retirement plans to account for changing economic conditions and inflation rates. This may include reassessing your expected retirement age, anticipated expenses, and withdrawal strategies. If you decide to delay retirement, this may allow more time for your investments to grow and to benefit from additional years of income. It may also increase your Social Security benefits, reducing the strain of inflation on your retirement funds. Ultimately, working with your financial advisor can help you develop a plan that is right for you.
It's important to note that we’ve provided the information above for general informational purposes only. For personalized advice and a detailed financial strategy tailored to your unique situation, contact Aspire Planning Associates. Our team of experts can guide you through the complexities of inflation and help you secure a financially stable retirement. Call us today at (925) 938-2023 to schedule a consultation. We look forward to hearing from you!
