Inflation was a key factor in the 2024 presidential election, perhaps the key factor. Political analysts began referring to election results as reflecting “the price of eggs,” which had doubled (or tripled, according to some) during a period of about a year and a half labeled as U.S. Pandemic-Era Inflation. The annual inflation rate, as measured by the Consumer Price Index, was 1.7 percent in February 2021. It had risen to more than 5 percent by June of that year, then peaked at about 9 percent a year later, in June 2022.
More than just eggs, inflation caused prices to go up across the board, for the producers of products as well as the buyers of those products. And the effects are still being felt. Just because inflation rates have calmed to near normal rates of around 2 percent annually, the higher costs remain.
Inflation erodes purchasing power, and that includes the purchasing power of your retirement plan. For retirees, and for everyone saving for retirement, that has meant rethinking how to ensure a secure financial future. The inflation of recent years has caused many people to reconsider retirement altogether. According to Investopedia, “The majority of soon-to-be and current retirees are thinking about delaying or coming out of retirement.”
Housing
For many of our clients, the major concern has been housing, paying increased rent versus buying a home with a higher mortgage, or for homeowners, holding on to the house and mortgage they currently have at pre-inflationary rates. For people looking to buy, the conversation can be about when to get back into the market, which could be delayed because even though rates are falling, they’re sticky—that is, it takes a lot longer for rates to go back down.
The dilemma applies to young people looking to purchase a home but also to older people who are, for example, looking to downsize or considering a move into an assisted living community.
Investing
For 2022, the S&P 500 was down 19.44%. That scared a lot of people who remain afraid to invest in market. We always take the long-term look because history tells us that pays off. For example, if you got out of the market in 2022, you missed a 13.7 percent run-up in the Dow in 2023 and an even bigger increase to date in 2024, more than 16.5 percent as of November 11. During the 2020 pandemic, the S&P 500 Index bottomed out on March 23, 2020 at 2,237. On November 14, 2024, it was at 5,902 – an increase of over 168%. Overall, history tells us, you can beat inflation by staying invested.
Asset allocation, adjusted regularly based on the client’s circumstances and needs, is key to maximizing portfolio returns and beating inflation. Investments such as stocks, inflation-protected bonds, and commodities can act as hedges against inflation. Stocks and real estate are strong options for retirees looking to combat inflation. Commodities tend to do well when inflation rises, making them a valuable part of a diversified portfolio. Of course, these are generalities. Work with your financial advisor to build a portfolio that accommodates your unique financial objectives and to make adjustments regularly to accommodate your changing circumstances and finances.
Note: If you are still working, it is key to continue to contribute to your retirement plans, even increase your contributions if possible as a hedge against future inflation.
Social Security
Periods of high inflation—even considerations of normal inflation—remind retirees of the steadily increasing funds they will need to maintain their lifestyles in retirement. One consideration: how to take Social Security when the time comes. Individuals who delay claiming Social Security benefits can receive significantly more than those who claim early. Delaying Social Security until age 70 can result in benefits that are 124 percent of the full retirement amount and up to 132 percent of the standard monthly benefit.
This is particularly important for couples when one spouse has more earnings than another. One solution: The spouse with the lower income takes Social Security at the qualifying age of 62 or at the initiation of Medicare at age 65. The higher earning spouse waits to age 70 or at least full retirement age. If their payment is more than twice that of the lower income spouse, the lower income spouse’s monthly payment automatically increases to half that of the higher income earner.
Cash Savings/Emergency Funds
An emergency fund can help you maintain investment stability during inflation. Having an emergency fund can prevent you from having to liquidate long-term investments. A detailed budget can help track income and expenses, prioritize needs, and identify flexible spending areas. There are different theories on how much emergency cash you should keep on hand, typically tied to your expected expenses over a period of time, such as three or six months. The caveat: Be cautious with cash savings as inflation can and will erode their value over time.
Annuities
Annuities have received mixed reviews over the years. Fees are higher than other investments but the trade-off is a guaranteed income that keeps pace with inflation.
In addition to paying higher fees, you risk losing out on market gains. For example, if the market goes up 20 percent and you’re capped at 80 percent of the increase, you lose 20 percent of the gain. One approach to capitalizing on the guarantee provided by an annuity is to consider it as one bucket of your overall investment program.
A comprehensive retirement strategy, including adjusted asset allocations and a realistic budget, can mitigate inflation’s effects. Your financial advisor will help you create a plan that makes sense for you. Then meet with your advisor regularly to revisit your plan to stay on track to a secure, fulfilling retirement, regardless of inflation.
IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that the future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.
The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
