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July 2022

Inflation as a Risk in Retirement

By Inflation Risk, Retirement Planning

Inflation can be troubling, especially for those living on a fixed income. Here’s what you need to consider.

Exiting the work force and beginning the next chapter of your life can be infinitely exciting. After a long career, free time afforded by retirement offers a great opportunity to check off long-awaited bucket list items or develop those relationships with loved ones. You might also stop setting alarms in the morning, making sure that you get the right amount of sleep to propel you toward your dreams. There is, however, one area in which you might not want to hit the snooze button: your finances.

With improvements in science and medicine have come increases in life expectancy, extending the length of retirement for the modern worker. While it’s great to plan to be around longer to pursue passions and spend time with family, longer life expectancy does present a challenge. Retirees used to plan for 10 to 15 years of retirement, but it’s no longer strange for someone to live to 100, meaning that retirement could potentially last 30 years [1].

Prolonged retirement can bring about longevity risk, which is the risk of running out of money while still alive, and inflation provides zero relief when it comes to making your money last. Inflation decreases the purchasing power of the dollar, which can create a serious problem for retirees living on fixed incomes and retirement accounts they’ve built over the course of their careers. Now inflation is at a 40-year peak [2], which can cause headaches, especially for those entering retirement as they’re forced to deplete savings faster than they might have under lower inflation rates.

Luckily, there are a few ways to alleviate some of the pain points when it comes to inflation in retirement. First, it can be beneficial to contribute to your retirement accounts early in your career. You can begin planning for retirement too late, but you can never begin too early. Some investment vehicles designed to build retirement assets for your future include employer-sponsored 401(k) plans, 403(b) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional 401(k) and IRA accounts grow tax-deferred, meaning that contributions will be made before taxes are taken from your paycheck then are taxed upon distribution. Roth accounts are distributed and grow tax-free if all IRS regulations are followed, but initial contributions are made with post-tax dollars. Both grow with compound interest; which Albert Einstein called the eighth wonder of the world. Compound interest means you will accrue more interest through time based on your growing account balance, so taking the time to feed those accounts when you’re younger can be extremely rewarding.

If you are getting close to retirement and don’t have decades of time on your side, there are a few more things about inflation that you should know.

Social Security considers inflation annually when calculating benefits, and some years it provides a cost-of-living adjustment, or COLA, based on one of the federal government’s consumer price indexes called the CPI-W. In 2021, Social Security beneficiaries received a 5.9% COLA, which was the highest increase since 1982, but it’s important to remember that COLA may not always cover increased costs. For example, beneficiaries received no increase in 2015[3] despite an incremental 0.12% inflation rate [4].

Some annuities are also specifically designed to combat inflation by offering a COLA. Annuities are contracts between buyers and issuing insurance companies which guarantee annuity payments based on the insurance carrier’s claims-paying ability [5] as well as the terms of the contract. With annuities that offer a COLA, the pre-determined payments may be adjusted to account for inflation.

Lastly, it’s always important to consult your financial professional to find solutions to suit your unique, individual situation. The proper guidance can assist you in determining whether or not you’re placing enough money into various retirement accounts for potential future inflation without disrupting your desired lifestyle.

If you have any questions about how inflation may affect your retirement, please give us a call! You can reach Drew Capital Group Private Wealth Management in Tampa, Florida by calling (813) 820-0069.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

 

Sources

  1. https://money.usnews.com/money/retirement/articles/how-living-longer-will-impact-your-retirement
  2. https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4
  3. https://www.ssa.gov/oact/cola/colaseries.html
  4. https://www.worlddata.info/america/usa/inflation-rates.php
  5. https://www.investopedia.com/terms/l/lifetime-payout-annuity.asp

Christopher Drew Guest Contributes for Benzinga

By Financial Literacy, Retirement Planning

Christopher Drew, the founder of Drew Capital Group recently published an article for Benzinga to discuss 10 things he believes everyone should do to stay on track financially.

When mapping out a financial plan, it can be difficult to know where to begin. Now, with inflation at its highest in decades, only one-third of Americans expect their financial situation to improve in 2022. Nevertheless, Christopher Drew believes that anyone can act to improve, and he laid out a 10-step ongoing to-do list to guide anyone looking for a place to start. Here’s how to stay on top of your affairs.

  1. Do a deep dive into your spending and recast your budget.

Eliminate excess spending and wasteful patterns that detract from your savings and retirement.

  1. Evaluate your debts.

Commit to lowering your debt by paying the most expensive debts first. You can also renegotiate your interest rates or transfer debt to a card with 0% interest.

  1. Increase your retirement contributions.

Eliminate debt and contribute to retirement accounts that potentially provide growth and help build your nest egg. If your company offers a 401(k) plan, contributing pre-tax income to a 401(k) can help build your retirement tax-deferred and with compound interest.

  1. Consider opening an HSA.

A health savings account takes pre-tax contributions and allows you to use them on medical expenses not covered by your insurance plan. An HSA requires you to be enrolled in a high-deductible health plan. A High-Deductible Health Plan, which you are required to have to qualify for an HSA, can put a greater financial burden on you than other types of health insurance. There are advantages and disadvantages to HSA’s, and you should always consult your financial advisor regarding your own personal situation.

  1. Review your estate plan.

A proper estate plan can help your family rather than burdening them with tasks. This can include drawing up wills and living wills, designating power of attorney, and making beneficiary designations.

  1. Review your insurance plans.

Check your insurance plans like life, home and auto to determine if you need more coverage. Another important consideration is for the possibility that you may need long-term care insurance.

  1. Plan for life events.

Everyone knows how important an emergency fund is for events like medical expenses and accidents, but it’s also necessary to plan before marriage, having a baby, purchasing a home or car, or changing jobs.

  1. Consider a home office tax deduction.

Working remotely may have changed your ability to claim part of your home as a business expense. It is always helpful to consult a business or tax professional to see if you qualify.

  1. Build an emergency fund.

We think your emergency fund should hold six months’ worth of expenses and be separate from your personal savings. Adding periodically can be the best way to watch it grow, contributing when you receive bonuses or tax refunds.

  1. Evaluate your investments.

Assess your risk tolerance and rebalance your portfolio accordingly. You can work with a financial professional to set new goals and draw a map to reach them.

If you have any questions about financial health and how you can improve your situation, please give us a call! You can reach Drew Capital Management, in Tampa, Florida at (813) 820-0069.

To read the entire article and learn more about Christopher Drew’s financial to-do list, click here.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory services offered through Drew Capital Management, a Member of Advisory Services Network, LLC. Insurance products and services offered through Drew Capital Group. Advisory Services Network, LLC and Drew Capital Group are not affiliated.

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