By Dejan Ilijevski
Have you been keeping up with recent news? If so, you’ve likely observed high inflation rates and the looming threat of a recession continuing to dominate the headlines. This isn’t just media sensationalism; over the past year, everyday expenses such as groceries, fuel, and healthcare have noticeably surged in price, sparking concern among those on fixed incomes or preparing for retirement. And now, 54% of Americans say that inflation is the main reason they’re not saving more for retirement. The discrepancy between rising expenses and stagnant income can understandably cause anxiety for your financial future.
However, is this cause for despair? Not necessarily! In this article, we outline six proactive steps you can take to mitigate the impact of inflation and fortify your retirement savings for the long haul.
Why Is Inflation a Threat?
Inflation is the general rise in the price of goods and services over time. It is a normal part of a growing economy, but over the past year, it has become a major obstacle for those who are nearing retirement or have already retired.
The Consumer Price Index (CPI), which is a common measure of inflation, was 3.5% for the 12 months ending in March 2024. This is still quite a bit higher than the average 2% yearly inflation numbers we’ve grown accustomed to in prior years.
As the cost of goods rise, many retirees are left with a fixed amount of income for the rest of their lives. Too much of an increase in cost can quickly price retirees out of the comfortable retirement they worked so hard to build.
What Can You Do to Safeguard Your Savings?
Though inflation has continued to rear its head, thankfully there are steps you can take to minimize the impact.
1. Reassess Your Budget
The first step in overcoming inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants with only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, a good way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.
For retirees, this might mean cutting back on discretionary expenses such as traveling, recreation, or going out to eat. You could even reassess your living situation and downsize to a smaller home or condo if it makes sense for your overall financial plan.
Reassessing your budget is an especially useful tactic when the market is in a downturn. The more you can avoid withdrawing from your portfolio to pay for everyday expenses, the better off you’ll be in the long run.
If you are aware of upcoming costs that could place strain on your finances, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
2. Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will likely be paid back with money that is worth less than it was when it was originally borrowed.
This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
3. Consider TIPS
Another great way to overcome inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they may not earn the highest rate of return, but your purchasing power should remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
4. Diversify Your Income
Retirees often have several sources of income, but they are usually relatively fixed in amount. If your expenses are greater than these income sources, you may be forced to draw from your investment assets. An effective way to avoid, or reduce, portfolio withdrawals is to diversify your income. Not only could this improve your portfolio longevity and provide you with more flexibility in retirement, but it can also help minimize the impact of inflation.
Diversified income streams act in much the same way that diversified investments do. They allow for less demand on any single income source so you have the flexibility to handle increased costs or unforeseen events without depleting your portfolio reserves. There are many ways to diversify your income, including:
- Invest in real estate. Owning rental properties is a great way to earn passive income without dipping into your retirement savings. Real Estate Investment Trusts (REITs) are another popular option.
- Continue to earn active income. You could also pursue a passion, become a freelancer, or work for a nonprofit. You might earn less than what you’re making now, but these options may provide flexibility and a form of income diversification that could keep your retirement savings safe from inflation.
- Use dividend-paying stocks. Dividend-paying stocks can provide an automatic income stream by distributing company earnings to investors. However, a company’s share price will also decrease by the dividend amount paid, reflecting the distribution of company value to shareholders.
5. Put Idle Cash to Work
You may think that the best way to ride out the uncertainty storm is to stockpile loads of cash in the bank. While this does keep it safe from volatility, it does nothing to protect you from inflation. Each day your funds sit idle, inflation could eat away at your purchasing power. This issue can be minimized by making sure even your reserve funds are earning a competitive interest rate.
For instance, high-yield savings accounts are currently paying upwards of 6% interest. Right now, that’s slightly higher than the 3.5% inflation rate and much better than the 0% interest you would earn from most checking accounts.
There are other options that can improve your interest rate while still keeping your funds relatively safe, including money market accounts, certificates of deposit, and short-term Treasury bills. No matter which option you choose, managing your excess cash with inflation in mind is the best way to improve your portfolio longevity and safeguard your retirement.
A Custom Plan to Shield Against Inflation
Feeling concerned about retirement in the face of soaring inflation rates and market turbulence? Rest assured, there are strategies to employ. At SCM Investment Services, we tailor custom plans to safeguard your retirement from inflation’s effects so you can rest easy in your retirement.
Are you ready to make the most of your financial journey? To schedule a complimentary introductory meeting or request a free financial health checkup, call (219) 225-1934 or email dejan@scminvesting.com.
About Dejan
Dejan Ilijevski is Financial Advisor, Investment Manager, and Founder of SCM Investment Services, an independent, fiduciary, fee-only financial advisory and investment management firm based in Lake Elmo, Minnesota. With an evidence-based approach to investing grounded in economic theory and reliant on insights from financial science, he customizes globally diversified portfolios of mutual funds and ETFs for his clients. With 20 years of experience in the trading/financial services industry, and described as trustworthy and community-oriented, Dejan is passionate about helping individuals and families, prioritizing their best interest first and foremost.
Originally Dejan pursued a career in research and technology but was recruited by a startup trading firm at the Chicago Board of Trade. He took advantage of this rare opportunity, curious to learn more about capital markets. Dejan’s technical background provided a unique skill set, and by the end of his rookie year, he routinely transacted over $1 billion in U.S. Treasuries daily, making him one of Chicago’s biggest bond traders. He consistently earned the highest profits for the firm for many years and continued to advance professionally in the trading arena.
With newfound experience and insight, Dejan came to realize his parents were being exploited by their financial advisor and that the financial services industry does not work in your best interest. After earning his MBA from the University of Chicago Booth School of Business, Dejan left the trading industry to start an independent financial advisory firm based on integrity and transparency and built on the belief that everyone deserves trusted, knowledgeable financial advice—blending Wall Street expertise with Main Street values.
Serving the broader community as an investor advocate, a proponent for financial literacy, and sponsoring nonprofit initiatives, Dejan is a trusted subject matter resource for many financial news media publications. He and his wife, Daniela, reside in Munster, Indiana, with their two kids. In his free time, he enjoys road cycling, reading, playing soccer, traveling, going on adventures (even skydiving!), and serving local charities. To learn more about Dejan, connect with him on LinkedIn.
