Retirees Affected By Inflation, High Housing Costs


With inflation at the highest rate in four decades, every facet of the economy is affected and that has put many people in the position of having to rethink their retirement plans.

Professor Tom Smith of Emory University’s Goizueta School of Business says that people who are soon to retire and those just starting to plan for retirement can find themselves in quite a spot.

“When you have these types of fluctuations, people have to reevaluate what they think retirement can purchase,” Smith said. “You’re going to be on a fixed income when you retire. You’ll either be on Social Security, drawing a pension, or whatever else. The higher the inflation is, the less buying power your fixed income has.”

Smith added with inflation, higher housing costs, and general costs of living being higher right now in the U.S. than what had been seen during the Reagan administration, retirees are going to find it very difficult to enjoy the retirement their parents may have.

“If you are drawing from a retirement account,” he said. “The retirement account does not have a cost of living adjustment. The retirement is drawing money from an IRA or a 401k. Social Security adjusts for inflation, but it is not going to compensate for 8% or 9% inflation. That is not ever going to happen.”

He added it is not just retirees or retirement planning, it is a gamut of people who are quickly being painted into a corner.

This may force many to recalculate how they look at financial planning not only for retirement but how to be more sustainable in day-to-day life in general.

“If you get a 2% to 3% raise every year, that has worked pretty well for the past 15 years or more,” said Smith. “But if you are getting a 2% raise against a higher rate of inflation, you are doing worse. You are getting more money, but it is worth far less. That is not a sustainable system. All these factors figure into if you think you can retire in one year, two years, 10 years, or even 20 years. If at all.”

Smith said when you look at how people in the U.S. do things, compared to other developed countries, we pretty much work forever anyway.

“The worst thing to happen is to retire into an economy that is not doing well, where there is heavy inflation. People need to adjust and there is little evidence out there that people actually do adjust. There is plenty of evidence that people do not adjust. Including that the average family has about $500 saved, on average. Of course, that is only the average. Some families have a lot of money saved, but many people have absolutely nothing or very little saved, at all.”

Mike Miller of Greenville, South Carolina, is Senior Financial Planner for Ronald Blue Trust and host of the weekly radio and podcast program “Talking Money Radio.” He says people absolutely need to think and plan for the long-term and it is never too early to start planning financially.

“When you are preparing for retirement, you are young and starting off, that is when you are dollar-cost averaging into your 401k, putting enough in to get a match. You always want to get the match,” Miller said. “Keep sticking it in whether prices are going up or down. You must be consistent. And make sure you are reducing or eliminating debt before you reach retirement so that you have more flexibility. You are less affected by inflation when you have less debt. Because with debt, you are paying off more with cheaper dollars.”

Miller added people, especially in difficult economic periods, can get skittish about playing in the stock market but he says those who invest in a correct manner can make out much better in the market than with other means of financial planning.

“At Ronald Blue, we try to get clients to think in buckets,” Miller said. “You have a short-term bucket, an intermediate-term bucket, and a long-term bucket. The only one that should be affected negatively by the market is the long-term bucket. You should still keep up the investing in your 1 to 5-year bucket that is not affected by that, so that you can weather storms and not worry about your long-term bucket. It is hard for people sometimes when doing investing to look over their investments. When you have a diversified portfolio some investments will do well, others will not do well. Just invest and stay the course over the long-term.”

Both Smith and Miller do not see real estate as a wealth-building investment. However, both concur it serves as a hedge against inflation and right now, the housing market skyrocketing in cost is putting a strain on all areas of finance.

That is not to say you cannot get or maintain the upper hand. Depending on where you are in the process of your retirement planning.

“Real estate is not a good way to build wealth, in my opinion,” Smith said. “It is however a good hedge against inflation. Real estate usually appreciates around the rate of inflation, but there are tax benefits and individual benefits to owning property. The low interest rates were beneficial to people wanting to get into a home, but right now house prices are obnoxious, they are way too high. It’s ridiculous. It is an unenviable position to be a young family. But it is not very clear that millennials like the idea of a nuclear family. They don’t seem to want to get married, have a dog and 2.5 kids.”

Miller said if you are retiring into this economy now, or in the next couple of years, if you planned well, you may do well, but adjustments may need to be made just the same.

“It is a reminder to get and keep your debt under control,” Miller said. “Do this before you reach retirement and that your housing is in place. If you retire and have paid for a house, you can downsize and potentially end up in a good spot.”

He added the cost of living has skyrocketed right now, as has the cost of even smaller homes, so adjustments are warranted in many cases.

“You may end up traveling less because travel costs are up,” Miller said. Food prices are up and would affect the retired even more because everyone has to eat and prices have gone up, so people may end up eating out less.”

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