As if the pandemic hasn’t been hard enough on retirees, those living on low to moderate incomes have been hit with the one-two financial punch of rising inflation and low interest rates.
Those senior citizens found themselves paying more for essentials, while earning next to nothing on their savings and getting a monthly Social Security check that rose by just $20 on average this year. That annual cost of living adjustment by the Social Security Administration was based on inflation growth from the third quarter of 2019 to the third quarter of 2020.But that rearview adjustment didn’t account for the pandemic-induced inflation spike that occurred this year. In an email survey of retirees, the Senior Citizens League found that the vast majority (86%) said their expenses this year grew by more than $20 a month, with 40% saying they’d grown by more than $100, said Mary Johnson, the League’s Social Security and Medicare policy analyst.
Modest income, modest net worth
Social Security benefits, which average $1,544 a month, are a major source of income for the majority of retirees, according to the Social Security Administration. In fact, they make up 50% or more of the monthly income for half of married recipients and seven out of 10 of single recipients.Read MoreFor many of those retirees, the potential to draw income from elsewhere — such as savings, investments and home equity — is modest. Seniors with average household income of $29,000 a year, for instance, have an average net wealth of $278,742, according to the Center for Retirement Research at Boston College, which based its calculations on the Federal Reserve’s 2019 Survey of Consumer Finance. Those earning just under $15,000 a year had an average net wealth of $123,841.In another SCL email survey, when retirees were asked what financial changes they made since the pandemic started, 34% said they had tapped their emergency savings while 19% said they applied for food assistance (SNAP benefits) or visited a food pantry. And 19% said they had to draw down more from their retirement savings than they planned.
Some inflation relief may be in sight
As a result of the spike in inflation this year, retirement experts now expect the next cost of living adjustment to Social Security benefits will be the largest since 1983. The SCL and the CRR both estimate benefits could rise by roughly 6%, an increase that would show up in Social Security checks next January. (The official COLA will not be announced by the Social Security Administration until October.)But that increase still may not be enough to make seniors whole again, for a few reasons. While inflation has moderated a bit this summer, prices are still rising. What’s more, the cost of living adjustment may also be somewhat undercut by two factors, according to a recent CRR brief. The first is rising Medicare premiums, which are deducted from one’s Social Security check and reduce the amount left over to pay for other essentials. And the second is taxes, since the threshold for family income that determines whether a portion of your Social Security benefits will be taxed is not adjusted for inflation. So as your check grows, so too will the chance that you will owe income taxes on a portion of it.
Playing it too safe presents its own risk
As asset classes go this year, US stocks were a good place to be, having risen 100% from the lows they hit at the start of the pandemic.But many retirees often rely more heavily on safer investments that pay interest. Keeping money in cash and cash-equivalent assets like CDs, money markets and interest-bearing savings accounts provided paltry growth this year, given that anemic interest rates were far outpaced by inflation, thereby eroding savers’ purchasing power. Many bonds didn’t perform well, either, with the S&P 500 bond index and most S&P US Treasury bond indices trading down year-to-date.So for very risk-averse retirees, managing the savings they have for maximum return is especially tricky these days.Interest rates are unlikely to increase before 2023, according to the Federal Reserve’s own economic projections. And the roaring stock market may be in line for a correction sooner rather than later. So what’s a risk-averse retiree with modest means to do?
How does inflation affect my standard of living?William Nunn, a fee-only certified financial planner who founded Horizon Financial Planning in New Orleans, recommends retired clients have at least six months’ worth of their bill payments in cash. Given how low interest rates are, he prefers putting that money in savings accounts over CDs to avoid the penalty that you may incur if you have to pull money out of a CD before it comes to term. “It’s not worth the risk of losing the CD interest you earned to break it. And if you do, you also may have to pay a fee,” Nunn said.Beyond money for bills and any other funds stashed in a liquid account for emergencies, retirees who are keeping the rest of their savings in bonds and cash-equivalent assets may be taking on more risk than they realize, SCL’s Johnson said.”The low interest rates are taking a huge toll on retirement plans. And retirees who are invested in CDs and bonds are not getting the type of return they need to make savings grow and last through retirement. That means more people have to turn to equities and investments such as real estate.”
While that will entail more risk and volatility, it may offer the best chance of beating inflation over time if you invest funds you won’t need for five or more years to those asset classes.While it would be optimal, the goal is not for every dollar saved or invested to outperform inflation so much as it is for your retirement savings as a whole to do so over time, Nunn said. “You should view your portfolio in terms of a total return.”
Source: edition.cnn.com