Understanding Inflation, Part 3: What if You’re Retired When Inflation Hits?
August 27, 2021
In my last piece, we covered how to combat higher inflation if it’s here to stay. Your best defense is to keep money you won’t need for a while invested in global stock markets, which have dramatically outpaced inflation over time. But what if you’re in retirement, and you need a reliable income stream today? Here are a few ideas.
Have a plan: Have a solid strategy in place to determine:
- Spending: How much can you safely withdraw from your investment portfolio to supplement your other income sources (such as Social Security)?
- Tax-Efficient Investing: Seek to further offset inflation through tax-wise investing. For example, try holding your least tax-efficient assets (like bonds) in tax-sheltered accounts, and your most tax-efficient assets (like large-company stocks) in taxable accounts.
- Tax-Efficient Withdrawal: Which accounts will you tap first, and then next?
Revisit Your Retirement Planning: When inflation is on the rise, it’s worth revisiting your spending, investing, and withdrawal strategies. What are the odds your current course won’t deliver as hoped for? We typically use odds-based “Monte Carlo” simulations to ask this critical question, and guide any sensible adjustments the answers may warrant.
Don’t Panic: What if inflation is taking too big a bite? A common misstep is to abandon your carefully structured plans in pursuit of short-cuts. For example, you may be tempted to unload high-quality bonds and pile into gold, dividend stocks, Real Estate Investment Trusts (REITS), or other ways to stretch for higher (but less dependable) yields. We believe such substitutes detract from effective retirement planning. The goal is to optimize expected returns and manage unnecessary risks in pursuit of a dependable outcome.
Have a Back-Up Plan: What can you do instead? Have a backup plan already in place, in case “Plan A” isn’t panning out. What are you specifically willing to do to get back on track? Will you get a part-time job? Spend less? Relocate to a lower-cost location? Rent out a room in your home? These sorts of belt-tightening choices are never fun. But you should prefer them over chasing unsubstantiated sources of return that could dig your risk hole even deeper.
That’s a wrap on conversations about inflation … for now. I’ve also put together a white paper on the subject, which you can access here.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience, and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.