Category

Inflation Risk

Jul 20
0

Inflation as a Risk in Retirement

By | Inflation Risk, Retirement

Inflation can be troubling, especially for those living on a fixed income. Here’s what you need to consider.

Exiting the work force and beginning the next chapter of your life can be infinitely exciting. After a long career, free time afforded by retirement offers a great opportunity to check off long-awaited bucket list items or develop those relationships with loved ones. You might also stop setting alarms in the morning, making sure that you get the right amount of sleep to propel you toward your dreams. There is, however, one area in which you might not want to hit the snooze button: your finances.

With improvements in science and medicine have come increases in life expectancy, extending the length of retirement for the modern worker. While it’s great to plan to be around longer to pursue passions and spend time with family, longer life expectancy does present a challenge. Retirees used to plan for 10 to 15 years of retirement, but it’s no longer strange for someone to live to 100, meaning that retirement could potentially last 30 years [1].

Prolonged retirement can bring about longevity risk, which is the risk of running out of money while still alive, and inflation provides zero relief when it comes to making your money last. Inflation decreases the purchasing power of the dollar, which can create a serious problem for retirees living on fixed incomes and retirement accounts they’ve built over the course of their careers. Now inflation is at a 40-year peak [2], which can cause headaches, especially for those entering retirement as they’re forced to deplete savings faster than they might have under lower inflation rates.

Luckily, there are a few ways to alleviate some of the pain points when it comes to inflation in retirement. First, it can be beneficial to contribute to your retirement accounts early in your career. You can begin planning for retirement too late, but you can never begin too early. Some investment vehicles designed to build retirement assets for your future include employer-sponsored 401(k) plans, 403(b) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional 401(k) and IRA accounts grow tax-deferred, meaning that contributions will be made before taxes are taken from your paycheck then are taxed upon distribution. Roth accounts are distributed and grow tax-free if all IRS regulations are followed, but initial contributions are made with post-tax dollars. Both grow with compound interest; which Albert Einstein called the eighth wonder of the world. Compound interest means you will accrue more interest through time based on your growing account balance, so taking the time to feed those accounts when you’re younger can be extremely rewarding.

If you are getting close to retirement and don’t have decades of time on your side, there are a few more things about inflation that you should know.

Social Security considers inflation annually when calculating benefits, and some years it provides a cost-of-living adjustment, or COLA, based on one of the federal government’s consumer price indexes called the CPI-W. In 2021, Social Security beneficiaries received a 5.9% COLA, which was the highest increase since 1982, but it’s important to remember that COLA may not always cover increased costs. For example, beneficiaries received no increase in 2015[3] despite an incremental 0.12% inflation rate [4].

Some annuities are also specifically designed to combat inflation by offering a COLA. Annuities are contracts between buyers and issuing insurance companies which guarantee annuity payments based on the insurance carrier’s claims-paying ability [5] as well as the terms of the contract. With annuities that offer a COLA, the pre-determined payments may be adjusted to account for inflation.

Lastly, it’s always important to consult your financial professional to find solutions to suit your unique, individual situation. The proper guidance can assist you in determining whether or not you’re placing enough money into various retirement accounts to account for future inflation without disrupting your desired lifestyle.

If you have any questions about how inflation may affect your retirement, please give us a call! You can reach Bulwark Capital Management at 253.509.0395.

 

Sources

  1. https://money.usnews.com/money/retirement/articles/how-living-longer-will-impact-your-retirement
  2. https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4
  3. https://www.ssa.gov/oact/cola/colaseries.html
  4. https://www.worlddata.info/america/usa/inflation-rates.php
  5. https://www.investopedia.com/terms/l/lifetime-payout-annuity.asp
Apr 19
2

7 Tips for Saving Money at the Pump

By | Financial Planning, Inflation Risk

Gas prices are on the rise. Here are some ways to save a little bit of money.

The surge in gas prices swooped in just in time to dampen the mood in 2022. With the Russian invasion of Ukraine continuing to impact oil prices all around the world, the best solution might be to embrace the climb and start brainstorming some small life changes we can make to compensate.

According to AAA, the United States hit its highest average price per gallon Mar. 11 at $4.33 [1]. By adjusting, it’s possible to save hundreds, or even thousands, each month [2], and that money could go right back into your pocket. Fewer trips to the pump mean more money in your wallet, which means more money that you can spend, save or invest in your future. Here are seven tips to save money on gas as the prices rise:

  1. Use public transportation

This option might depend upon your geographic location and living situation, but you may be able to save on gas by taking public transportation. It may not be an option in widely-sprawling metro areas or cities without public transportation systems, but in major cities like New York, San Francisco, Boston, Philadelphia or Seattle, one household could save $10,000 or more each year by opting to use public transit [2]. That total could depend upon other factors, like the type of car you drive, insurance and parking, but gas and rising prices certainly figure into your possible savings.

  1. Start carpooling

For those who have longer work commutes or don’t live in cities with public transit systems, carpooling can be a great option. By finding a work friend who lives nearby and makes a similar commute, you might be able to cut your gas expenditure in half. Those savings can multiply if you decide to invite more people into your car pool, and it might even be a great option for those looking for more social outlets. Carpooling can also help the environment by reducing emissions, and it saves you time by cutting traffic and giving you access to the glorious high occupancy vehicle lane.

  1. Download price-viewing apps

Gas prices fluctuate based on location and company. Don’t you hate it when you get gas, then drive one mile down the road and see prices 30 cents cheaper than the price you just paid? Luckily, there is an easy fix for that problem. Phone apps, like GasBuddy [3], list prices for nearly every filling station in your immediate area. Users update the information to ensure that the prices you see are accurate, and you can pinpoint the cheapest gas with just a few taps. Simply checking nearby gas prices or rates in a specific city or zip code is free, but GasBuddy also offers premium, fee-based options that can help users rack up even more savings.

  1. Become a member of wholesale stores

Wholesale stores, like Costco, may feature lower gas prices depending on your area. Granted, a membership to Costco might cost you $60 annually [4], but we can do some quick math to see just how that membership fee has the potential to pay for itself. Prior to the pandemic, the average American filled their gas tank roughly once per week [5]. According to GasBuddy searches, in large metro areas like Los Angeles, Costco’s average price per gallon might be somewhere between 25 cents and 50 cents per gallon less than the average price in the area [6]. If you fill up your 12-gallon tank once per week, the lower end of the scale results in a savings of $3 per full tank. That may not sound like much, but for one person, the $60 annual membership fee is covered in 20 weeks, or less than half a year. Furthermore, Costco’s most basic package, the Gold Star membership, includes a second membership at no additional cost for someone over the age of 18 living in your household. Let’s say, for example, your spouse also fills their 12-gallon tank once per week. The membership would be paid for in just 10 weeks, and you could still get cheaper gas for the rest of the year.

  1. Work from home

This isn’t an option for everyone, but it’s no secret that the best way to save gas is by simply not using it. According to the Pew Research Center, 59% of workers in the United States who are able to work from home are taking advantage of that opportunity [7]. The reevaluation of work circumstances truly kicked into gear during the pandemic, but even as the spread of the virus wanes, it can be a great option for those still looking to cut down costs at the gas station.

  1. Pay cash

Not all gas stations offer savings for paying with cash, but some do. In our transition to a cashless world, you might not carry cash as often as you used to, but a quick stop at your local ATM on your way to fill up might prove to be beneficial. Apps like GasBuddy may be able to show whether or not a gas station provides a discounted rate for customers who pay with cash [8]. Another easy way to tell if a station takes cash is if a sign clearly states that the rate per gallon is for cash payments. Some stations even have signs that flash between two prices, showing the price per gallon for payments with card versus the price per gallon for payments with cash.

  1. Find alternatives to long-distance hobbies

We would never advise that you give up your hobbies, but if you’re concerned about surging gas prices, staying home can be a good option. Weekend vacations or one-day getaways can easily be turned into staycations, and in 2022, there are so many great options for at-home activities. You can rent a recent movie, listen to music, play board games, grill out, invite friends over for a gathering, work out or play with your pets. The pandemic also opened the door for events like virtual happy hours and video hangouts, so if you just can’t reach your friends and family because of distance, you can still see them and interact with them extremely easily, all without spending a nickel on fuel.

If you have any questions about this article or how to protect your retirement plan during times of high inflation, please give us a call! You can reach Bulwark Capital Management at 253.509.0395.

 

Sources

  1. https://gasprices.aaa.com/
  2. https://www.moneycrashers.com/benefits-public-transportation-travel-for-less/
  3. https://www.gasbuddy.com/home
  4. https://www.costco.com/join-costco.html
  5. https://www.reviews.com/insurance/car/drivers-fueling-behavior-after-covid/#:~:text=Over%2082%25%20of%20US%20drivers,decrease%20in%20consumer%20gas%20purchases
  6. https://www.gasbuddy.com/home?search=los%20angeles&fuel=1&brandId=38&maxAge=0&method=all
  7. https://www.pewresearch.org/social-trends/2022/02/16/covid-19-pandemic-continues-to-reshape-work-in-america/
  8. https://www.tmj4.com/news/local-news/if-discount-is-offered-using-cash-and-not-plastic-can-help-you-save-at-the-pump
Nov 20
0

Does Your Retirement Plan Include Inflation Risk?

By | Inflation Risk, Retirement

Inflation may not always be top of mind when you think about planning for retirement. Of course, you will likely consider your current expenses, but you need to account for what the costs of those expenses could be over time.

None of us can predict the future, but we can plan. Inflation diminishes purchasing power over the years and increases the costs of services that retirees and pre-retirees need. Given that more Americans are living longer, it can pay dividends to include inflation risk in your overall planning.

The other issue we have to contend with when it comes to inflation is that we may be lulled into a false sense of security since government measures of inflation have been very low in recent years. In addition, safer investments like money market funds, CDs and government bonds generally yield less than the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Lower government inflation measures also have an impact on Social Security benefits. Among the features of Social Security is that benefits are generally adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. In October, the Social Security Administration announced a 1.6% COLA that takes effect in December for some beneficiaries and by January for most.

The average benefit increase for retired workers with the recently announced COLA is estimated to be $24 to $1,503 per month. Married couples both receiving benefits will see a $40 increase, on average, to a monthly payment of $2,531. The cost-of-living adjustment for 2020 is lower than that of 2019, which was 2.8%, and 2018, which was 2.0%.

Getting the most out of your Social Security benefit is extremely important for your retirement and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, so planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimated earlier this year that health expenditures are projected to increase 4.8% overall in 2019, up from 4.4% growth in 2018.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2009, the Kaiser Family Foundation says average family premiums have increased 54% and workers’ contributions have increased 71%, several times more quickly than wages (26%) and inflation (20%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses then you know the impact of what higher drug costs or services that Medicare doesn’t cover can do to your monthly budget. We often cite figures from Fidelity Investments, estimating that a 65-year old couple retiring in 2019 can expect to spend $285,000 in today’s dollars for health care and medical expenses throughout retirement. The figure doesn’t include long-term care.

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. The other thing to keep in mind is that while inflation has been low in the past decade, it is best to plan using higher long-term averages.

There are several ways we can address inflation risk, depending on your situation. Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk. Now is also a good time to contact us to discuss Medicare because the current open enrollment period runs through December 7 if you want to make changes or switch plans.

Let us know how we can help!

Contact Bulwark Capital Management at 253.509.0395.

 

Sources:
“Social Security Announces 1.6 Percent Benefit Increase for 2020,” October 10, 2019. Social Security Administration. Retrieved from: https://www.ssa.gov/news/press/releases/2019/#10-2019-1
“National Health Expenditure Projections 2018-2027,” February 2019. Centers for Medicare & Medicaid Services. Retrieved from: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf
“Benchmark Employer Survey Finds Average Family Premiums Now Top $20,000,” September 25, 2019. Kaiser Family Foundation. Retrieved from: https://www.kff.org/health-costs/press-release/benchmark-employer-survey-finds-average-family-premiums-now-top-20000/
“How to plan for rising health care costs,” April 1, 2019. Fidelity Investments. Retrieved from: https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs