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Should Retirees Be Less Worried About Inflation Than Current Headlines Suggest?

Are you living a comfortable retirement? Do the latest news reports cause you to worry about how ultra-high inflation affects your retirement? Should you proactively adopt strategies to tackle inflation right now?

Or is it something you simply don’t have to concern yourself with?

“The current inflationary environment poses unique challenges,” says Ted Wozniak, U.S. Head of Asset Management at SEI in Oaks, Pennsylvania. “It is driven by various forces such as supply chain disruption, foreign conflicts and government stimuli. With input cost on commodities such as grains and energy skyrocketing, inflation is prevalent in almost all sectors of the economy, to varying degrees.”

These headline numbers, of course, represent averages. They don’t necessarily mean the same thing to everyone. How inflation affects you may differ from how it impacts your neighbor next door or your nephew in Nebraska.

“The U.S. inflation rate defied expectations and rose to a new multi-decade high of 9.1% in the year ending June 2022,” says Myron Genyk, Co-Founder & CEO at Evermore Capital Inc. in Toronto, Canada. “This brings the average cost of something as simple as the typical household budget up by a significant amount. Although some commodity prices are coming off their recent highs, there are few signs of this slowing down. Now, of course, no individual person is an average person, and retirees are no different. Their consumption basket varies quite differently than someone who has just graduated high school or someone mid-career with small children. And retirees vary among each other, depending on their lifestyles.”

How does inflation affect people who are retired?

You’d be happy to discover several areas experiencing the high rise in prices are less relevant to retirees.

“Older households will typically travel less than younger families, which can insulate them from the brunt of higher gas prices and rising transportation costs in general,” says Andrew Latham, Director of Content at SuperMoney in Santa Ana, California. “Even retirees who usually travel a lot may find it easier to combine trips or share rides.”

It’s not just gas and transportation expenses that go down in retirement. Imagine all the things that you did while you were younger and working that you don’t need to do once you’ve earned your golden watch.

“According to the Bureau of Labor Statistics, seniors tend to spend proportionately less on transportation, education and apparel, and this seems to line up with our perception of retired living,” says Genyk. “Significant increases in tuition or rental car prices will affect retirees considerably less than younger Americans.”

The two biggest expense items in the typical budget fall under the “auto” and “home” categories. As you mature, the proportion of these expenses falls.

“Retirees generally own their own homes, so they do not face rising rents,” says Keith Weiner, President of Monetary Metals in Phoenix. “They often do not drive much, so they don’t face rising car or fuel prices.”

If you’re retired, you may find yourself much less impacted by inflation than the peers you left in the office.

“Retirees can actually be more insulated against some types of inflation than workers,” says Michael Fischer, Director and Wealth Advisor for Round Table Wealth Management in Westfield, New Jersey. “Retiree spending typically declines in certain areas like groceries or transportation, so the recent sources of inflation may be affecting workers more significantly than retirees. Retirees are also more likely to already own a home, which insulates against the cost of rising interest rates on mortgages and increasing rental inflation.”

Finally, there are some expenses you can simply turn off or defer if high prices scare you.

“Retirees are more shielded from rises in discretionary spending items,” says Wes Moss, Managing Partner and Chief Investment Strategist at Capital Investment Advisors in Atlanta. “These are areas that I like to refer to as the nice-to-haves. This includes discretionary spending on items like recreational travel, dining out, etc.”

Do retirees benefit from inflation?

This may surprise you, but if you’re retired, you may actually benefit from inflation. Here are three areas that can offer impressive upside opportunities for you in an inflationary environment.

Social Security

Inflation may be very high now, but many feel it will drop back to more moderate levels once we get past the current year-over-year comparisons. Remember, if you wait until the maximum age to start claiming Social Security, you could experience returns that exceed inflation.

“Social Security is one way you can benefit from inflation,” says Rob Stevens, Retirement Income Specialist at TIAA in Charlotte, North Carolina. “For example, those born in 1960 or after will have a ‘full retirement age’ of 67. Every year you wait to claim Social Security after that gives you an 8% increase in your benefit. Social Security also provides a tax-efficient, inflation-adjusted benefit.”

If you’re already receiving Social Security, you may still reap the rewards of inflation as the government benefit automatically increases with inflation.

“Social Security benefits are indexed for inflation,” says Latham, “So, at least those benefits are somewhat protected from the loss of purchasing power implied by inflation.”

Home Ownership

While things may be tailing off recently, home prices have risen faster than inflation. For many, their home represents the greatest portion of their personal assets.

“In the face of increasing costs across the board, inflation going up and people living longer (and more expensive) lives, there is a bright spot,” says Christian Mills, Head of Finance Relations and Home Equity with Reverse Mortgage Funding, LLC in Denver. “Home values have grown to historic levels, and Americans 65+ have almost an 80% homeownership rate. For the less affluent (investors with less than $1.5M in liquid assets), the home makes up the lion’s share of their net worth.”

These blossoming values can be captured by retirees in a variety of ways.

“While a home can become one of the more expensive cost centers in retirement due to property taxes, insurance and upkeep costs, the good news is that today’s retirees own record amounts of home equity that can be tapped to offset rising costs,” says Mills. “Although seniors may have less day-to-day purchasing power due to inflationary increases and financial market uncertainty, their home equity can be used to insulate their retirement plans from these uncontrollable forces.”

Roth Conversion

There’s no question the equity markets have exhibited more than the usual anxiety associated with rising prices. The inflation-induced fall in stock prices presents a rare opportunity to reduce taxes while in retirement.

“A benefit of the falling market is that taxpayers holding traditional 401(k) and IRA accounts now have an opportunity to convert to Roth accounts—jettisoning RMDs and securing tax-free income in retirement—at bargain prices,” says Kimberly Foss, President and Founder at Empyrion Wealth Management in Roseville, California. “Because assets in traditional 401(k)s and IRAs represent pre-tax contributions, converting to a Roth account requires paying taxes on them now in order to gain tax-free status when funds are withdrawn in retirement. It’s also worth keeping in mind that the current, relatively low-income tax rates in effect as part of the Tax Cuts and Jobs Act of 2017 are scheduled to ‘sunset’ in 2026 unless Congress acts to extend them. While there’s no way to predict what Congress will or won’t do, many taxpayers could be in a higher bracket in future years than they are now. That’s one more reason to consider a Roth conversion; it takes future income out of the taxable category.”

The headlines might scream of the ravages of inflation, but for some retirees, inflation may represent an unexpected benefit.

Are you one of these retirees?