Navigating Inflation in Retirement: How to Protect Your Spending Power
While inflation has generally improved in the past year or so, folks are still paying more for goods and services than they're used to. From a financial planning perspective, this short-term experience of above-average inflation has some valuable long-term lessons for seniors: throughout the course of your retirement, you should plan to cover rising prices every year as you're living off a relatively fixed income. The Federal Reserve tries to maintain an inflation rate increase of 2% per year, which it believes translates to a more stable economy. And even in years when inflation rates are below that target, modest upticks in costs will continue to compound and grow year over year.
Let's take a look at how inflation typically affects three top-line retirement spending categories and how comprehensive financial planning can give seniors the resources they need to adjust to rising costs.
1. Healthcare
Historically, healthcare costs have risen faster than the costs of other goods and services. That hasn't been the case lately: during the pandemic, low demand for non-essential medical care kept costs low, and post-pandemic inflation has, comparatively, made everything more expensive. But seniors should expect to spend more on their healthcare as they age, starting with their Medicare coverage. While Medicare Part A (inpatient hospital coverage) is free, premiums for Part B (outpatient care and doctor's visits) and Part D (prescription drugs) usually rise every year.
As part of our annual planning process at Keen Wealth, we encourage seniors to sit down with a healthcare professional during the fall Open Enrollment period. Seniors can review their current Medicare coverage and explore other plans that might be a better fit for their financial and healthcare needs. We also help folks do cost-benefit analyses of tools like Health Savings Accounts and long-term care insurance to plan ahead for services that Medicare won't always cover later in retirement, such as in-home nursing or assisted living.
2. Housing
Even if you pay off your mortgage before retirement, the cost of living in the family home might be greater than it's really worth to you -- especially once the kids have moved out and you have more room than you really need. Electricity costs have actually risen faster than the rate of inflation recently. If you're living in an older home that doesn't use gas, electricity, or water efficiently, your utility bills could rise even higher. You're also probably going to pay more, more often, to replace household appliances and furnishings. The older you get, the harder it might be for you to maintain your home the way you used to. That means paying more for things like lawn care and contractors for household repairs.
And, of course, you'll still be paying your property taxes and insurance, which, like everything else on your household budget, will continue to rise over time.
Folks who want to "retire in place" might work with their advisor on a plan to prepare their home for retirement. You could frontload a bit more of your spending plan on quality-of-life and efficiency upgrades: replacing furniture and appliances, fixing the roof, and improving your insulation or plumbing. For bigger projects, you and your advisor might look for ways to tap into your home's equity, like a reverse mortgage. What you spend in the short-term on a new kitchen might save you money in the long run if you cook more and eat out less. Then, review your monthly budget and look for any household expenses that you can trim or cut, such as excess streaming services or subscriptions to magazines you never read.
If you want to cut costs even more or start a new adventure in retirement, the good news is that your house is a very valuable asset right now. You could use the proceeds from a sale to downsize into a more affordable and manageable home. Or, head to a state with lower costs of living or a retirement community where you won't have to pay for household maintenance.
3. Leisure and Travel
So many folks skipped vacations during the pandemic, and with the peak of recent inflation, analysts say high demand is driving travel costs even higher. According to the consumer price index for airline tickets, prices have generally risen since the end of the pandemic and are now higher than they were pre-pandemic. Overall, inflation trends have also pushed up the prices of hotels, gasoline, and restaurants.
Even homebodies who might only take one or two big trips in retirement should work with their advisor on an entertainment budget. The membership dues at your local country club will probably rise with inflation, as will the cost of raw materials for your woodworking and painting projects. With that dedicated spending budget in place, you can start looking for more ways to be prudent with your resources, such as working with a travel agent who can help you build some cost-effective flexibility into your dream vacation.
A diversified, adjustable, and regularly reviewed financial plan, along with an investment portfolio designed to support your lifestyle, could help you prepare for today’s inflationary trends while also preserving your future purchasing power. Make an appointment to visit my team at Keen Wealth, and let’s discuss your questions about inflation, retirement spending, and our comprehensive planning process.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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