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June 6, 2022, 4:24 p.m. EDT

‘This is a daunting time to retire’: In the age of inflation, there are steps you can take to deal with higher prices

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By Robert Powell

For the last two decades, retiree Brad Hansen hasn’t worried too much about inflation and the loss of purchasing power. That’s because inflation averaged only 2.54% from 2000 to 2009 and just 1.75% from 2010 to 2019, far below the historical average of 3.10%, according to InflationData.com.

Now with inflation rising to levels not seen in 40 years, Hansen is remaining calm, even after the Labor Department reported that consumer prices rose 8.3% for the 12 months ended April 2022. Hansen said the recent spike in prices has not yet adversely affected his finances, thanks to having a plan in place. 

“We’re not panicky investors in the short term,” said Hansen, who is married and spent his business career in corporate finance, including a stint as a sales manager and president of a bank-owned leasing company. At age 65, the Wisconsin resident has three sources of retirement income: part-time work, income from investments, and Social Security. “We always refer back to the retirement plan that we had previously calculated.”

That plan didn’t call for Hansen to retire on a shoestring budget hoping that everything goes right. Instead, his strategy included some wiggle room, a cushion for when adverse events such as inflation arise. “It starts out with having that plan,” he said. 

Hansen worried that if he didn’t have a plan, inflation or other economic shocks would force him into rounds of belt tightening, a search for alternative sources of income, or aggressive investing styles. He wanted to avoid the pressures and stress of trying to find sudden solutions to inflation, and instead carefully budgeted to withstand unforeseen events.  

Financial planners tend to agree with Hansen’s approach while also appreciating the difficult predicament retirees and prospective retirees currently face. MarketWatch spoke to several financial planners wrestling with the retirement inflation challenge. They emphasized planning and understanding personalized inflation rates, while also suggesting tactical solutions like bolstering savings and tapping home equity, or delaying retirement, Social Security benefits, and big expenses. One thing they all agreed on is that, in 2022, one of the Best New Ideas in Retirement is to take inflation seriously and develop a comprehensive strategy for the rise in prices

“This is a daunting time to retire, and higher inflation creates additional uncertainty,” said Jason Branning, a certified financial planner with Branning Wealth Management in Ridgeland, Mississippi.

Austin Rosenthal has been preparing for this moment. He retired a year ago after spending 21 years on Wall Street working for large investment management firms and, like Hansen, has a plan in place. His approach calls for him to live on $80,000 a year from his investment portfolio for the rest of his life and not have to work for a salary ever again. He’s got money in his nest egg from the sale of his house, money in his 401(k) plan that he can’t touch till age 59 1/2, and stock and income from a deferred compensation plan from his former employer.

“I can live off of that money,” said Rosenthal, 43, who was recently profiled in Texas Monthly as part of a story about the Great Resignation. “But again, $80,000 is my budget.”

To live on that income, however, Rosenthal trimmed the fat in his budget: Renting an apartment that costs $1,250 a month and purchasing health insurance for $225 a month (after receiving an advanced premium tax credit) through the Affordable Care Act’s Marketplace. And those two expenses are far below what the average U.S. household spends on housing and healthcare. Housing typically represents 30% of the average household’s expenses and healthcare 7%.

“I’ve been able to lower my two biggest expenses to now, basically, 25%,” said Rosenthal, a resident of Austin, Texas, who these days refers to himself as a digital creator and recently launched Social Musings by Austin , a website featuring his original writing, music and podcast episodes.

What’s more, his plan calls for him to be mindful of other expenses, including food, eating out, transportation and the like. “Have I had to manage certain things because of inflation?” asked Rosenthal. “Absolutely. But I have been able to thus far.”

Rosenthal did not create his plan specifically with inflation in mind. But Massi De Santis, a certified financial planner with DESMO Wealth Advisors in Austin, Texas, said now is the time to create a retirement plan that can evaluate the impact of higher-than-expected inflation.   

“Inflation reduces the purchasing power of your wealth over time,” said De Santis. “Since we have limited control over it, we want to reduce inefficiencies elsewhere. So, the first thing I would say for people close to retirement or in retirement is to make sure they have a plan in place that helps them optimize the value of their nest egg.”

What’s your personal inflation rate?

For Branning, the financial planner in Mississippi, the headline inflation rate reflected in the consumer price index is good to know, but what’s really important to understand is your personal rate of inflation. “One thing retirees should consider is that their personal inflation can differ from headline CPI,” he said. “Each retiree has their own personal annual inflation factor that may materially differ from the calculated CPI.” 

For example, as of March 2022, buying a new car cost about 12% more than the prior 12 months, said Branning. The March 2022 headline CPI annual increase was 8.5%, which included a 35% increase for used cars or 12% for new cars.

“But a retiree’s personal inflation may be lower by 1% to 3% than headline CPI depending on retiree spending,” he said.

And while the CPI indicates a big jump in inflation, two expense categories for many retirees 65-plus and those who spend at least $100,000 per year in retirement have not changed at all, Branning said.

“Taxes make up 26% of spending and housing, 25%,” he said. “So, if a retiree did not change their housing and their taxes were constant, potentially, only about half of their expenses will see inflationary effects.”

Delay, delay, delay

If you haven’t retired just yet, De Santis, the financial planner in Austin, recommends being conservative with your plans as long as inflation is higher than average. “One way to do this is with a one-two-three plan,” he said. “Plan to retire one year later, increase savings by 1% for the next two years, and reduce planned spending in retirement by 3% of what you have budgeted.”

Small changes, he said, can have a large impact over the next 25 to 30 years. De Santis added that working longer, or working part time if you’ve already retired, are two ways to reduce the ill effects inflation might have on one’s finances. 

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