Coping With Inflation On A Fixed Income | Business


Question: I only live on my retirement income. How can I stretch my dollars as inflation continues to make everyday items more expensive?

Reply: With supply chain disruptions and post-pandemic lockdown spikes in consumer demand, it looks like the prices of just about everything are going up. For fixed-income retirees, making ends meet can be a challenge under normal circumstances. This is especially true when inflation is a factor.

Plus, after years of low inflation, many retirees are understandably concerned about current consumer price trends.

“Across the country this is a major concern, especially with the Consumer Price Index at 5-5.5%, the highest we’ve seen in 13 years,” said Brian Robinson, financial planner certified and partner at SharpePoint Wealth Management.

Many retirees only receive their monthly pension or Social Security checks and these sources of income may not increase as prices rise.

“Even modest inflation can be a problem if the majority of one’s income is fixed. It’s important to keep at least some of your savings in investments that tend to keep pace with inflation, ”said Brooke May, Certified Financial Planner and Managing Partner at Evans May Wealth.

“We think modest inflation is here for an extended period, (so) the best hedge against that, in our opinion, will be the stock market and real estate,” May added.

Financial experts typically recommend a combination of growth and income stocks for their clients’ portfolios.

“(Depending on the situation) some retirees will need… up to 70% of their portfolio in stocks,” Robinson said. “(Some) hear this and they’re a little scared because they think the volatility is high. But where we are now, the biggest risk is having a lot of long-term bonds, because when inflation starts to rise, those bonds are destroyed. “

However, one type of government bond, inflation-protected Treasury securities, is guaranteed to keep up with inflation, Robinson added.

In real estate, as house prices / values ​​rise with inflation, the loan-to-value ratio of any outstanding mortgage debt decreases, which acts as a natural hedge against inflation, according to the Investopedia website. . As homeowners’ equity increases, the fixed rate mortgage payments stay the same and the resulting additional equity can be used in cash, if needed.

In general, real estate is a good hedge against inflation, as property values ​​tend to rise over time, offering investors the potential for continued income, according to a Forbes article. Rental properties can keep pace with or exceed inflation in terms of equity appreciation and higher rental income.

Yet the main concern of most retirees is how inflation affects their purchasing power, as they are more likely than younger consumers to spend money on things that tend to increase, such as health care.

According to the Centers for Medicare and Medicaid Services, the per capita health spending of older Americans was three times that of a working adult and five times that of children in 2014.

In 2018, the CMS estimated that healthcare spending increased by 4.6%. In the same year, inflation was 2.4%, which means that even when inflation is low, older people pay higher costs for health care and those costs are likely to continue to rise.

Overall, it is important to remain flexible in adjusting spending to ensure basic needs are met and to use investments, such as stocks and real estate, to provide additional income options, especially if you are a retiree on a fixed income.

Michael Bateman is a retiree who previously worked in marketing and corporate communications.

Michael Bateman is a retiree who previously worked in marketing and corporate communications.

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