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Retirement Planning > Spending in Retirement > Income Planning

War, Inflation and Retirement: How Could Current Events Shape Long-Term Plans?

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What You Need to Know

  • To counteract the impact of inflation, it’s important to have some retirement investments that typically move in line with it.
  • Amid market volatility, many advisors shift their clients’ assets toward more conservative investments as retirement approaches.
  • Clients heading into retirement should keep plenty of cash on hand to avoid the need to sell into a downturn.

Amid ongoing uncertainty about the economy, war in Europe and continued inflation, Americans are taking a closer look at their financial plans.

In a recent survey by New York Life, three-quarters of respondents said inflation had affected either their short- or long-term financial strategies, and 89% said they were concerned about a potential recession. 

Inflation affects everyone, but those who are retired or preparing for retirement may feel its impact more intensely than others. That’s because retirees typically plan to live on a fixed income, and inflation means that the amount they planned to spend in a given month or year won’t go as far. 

Effects of the Ukraine Conflict on Retirement Plans

Like other major geopolitical events, the conflict in Ukraine has created uncertainty in the world’s financial markets. Retirement plans heavily invested in stocks have likely seen their balances go down significantly in recent months, and will likely see continued volatility in the near term.

Effects of Inflation on Retirement Savings

Over time, inflation eats away at the real value of retirement savings, since it erodes the buying power of each dollar. To counteract the impact of inflation, it’s important to have some retirement investments that typically move in line with inflation, such as commodities or Treasury inflation-protected securities, and some investments, like stocks, that typically return more than the rate of inflation over the long term. 

How Does Current Volatility Affect Investing for Retirement?

Market volatility makes it very challenging to invest for retirement. That’s why many advisors start shifting clients’ assets toward more conservative investments as retirement approaches. That said, if a client expects their retirement to last for several decades (as many do), they’ll still need some assets in long-term investments to help counteract the impact of inflation. 

Do Social Security Benefits Increase With Inflation?

Yes. The Social Security Administration implements a cost-of-living adjustment, or COLA, every year to adjust monthly benefits based on annual inflation. While the agency has not yet announced the COLA for 2023, The Senior Citizens League estimates it could increase payments by 9.6% next year.  The Social Security COLA is announced in October.

Does Military Retirement Pay Increase With Inflation?

Yes, the military also implements an annual COLA to retirement pay. The military announces the COLA for 2023 in the fourth quarter based on the inflation rate between the third quarter of the year and the same period in the previous year. The increase, effective Dec. 1, will be reflected starting in payments issued in January 2023.

How Can You Help Clients Planning to Retire Soon?

Clients planning to retire soon may be particularly concerned about inflation and its impact on their nest egg. Take these steps to help clients in this position:

1. Keep them calm.

Headlines about inflation and market volatility can cause concerns, but some near-retirees may be better off than they think. The more you can communicate with clients in times like this, the better. Help them take another look at their plan, including their savings target, to see whether they’ve gone significantly off course. If not, you can reassure them that they don’t need to worry about what’s happening in the market right now. 

2. Adjust their plan as necessary.

If they’re not on track to meet their target, discuss what types of changes could help, including potentially working an additional year or two, increasing their savings rate, or considering changes to their planned retirement lifestyle.

Times like these also offer insight into a client’s true risk tolerance. If they simply can’t sleep at night due to concerns about the stock market, it may make sense to transition them into investments that tend to perform better during a recession, such as high-quality bonds or dividend stocks.

3. Discuss building additional cash reserves.

One of the biggest challenges for new retirees is sequence of returns risk, or the risk that withdrawals made after a market decline early in retirement can lock in losses and have a negative impact on a portfolio’s longevity. To prevent this, near-retirees might start building up their cash reserves before they kiss their paycheck goodbye. Having at least a year’s worth of expenses in a liquid account can provide time for investments to recover.

4. Focus on paying down variable debt.

Interest rates have been rising quickly, and appear poised to continue to do so, meaning any debt with a variable interest rate is about to get more expensive. By helping clients come up with a plan to reduce such debt, you can better secure their financial future.

5. Consider lowering future expenses.

One of the easiest ways to reduce the bite of inflation is to reduce overall expenses. You might discuss with clients the idea of downsizing or moving to a location with a lower cost of living in retirement. 

Taken together, rising inflation, increased market volatility, and concerns about a looming recession can feel overwhelming for retirees and near-retirees. As an advisor, this is your opportunity to prove your value by guiding them through the uncertainty.

(Image: Chris Nicholls/ALM)


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