As we wait impatiently for the next economic recession to get underway, we will also continue to keep an eye on inflation in the U.S. economy.
Most Americans are looking for ways to protect their retirement savings against the corrosive effects of inflation. Because, right now, inflation is still top-of-mind for Americans nearing retirement:
According to Fidelity’s 2022 State of Retirement Planning Study, 71% of Americans say they are very concerned about the impact of inflation on their retirement savings plan. Nearly one-third admit they don’t know how to make sure their retirement savings keep up.
Inflation prompted the Social Security Administration to give a cost-of-living adjustment (COLA) of 5.9% in January 2022, at the time the highest rate of increase in the last 40 years. The latest COLA, announced in October, was substantially higher — an 8.7% increase for 2023.
The good news is, this year’s COLA is finally helping ease the burden of inflation a little.
4 Strategies to Protect Your Retirement From Inflation
There are also four strategies that people saving for retirement can use to help protect their hard-earned savings against the tax that no one voted for.
Let’s take a brief look at each one…
1.) Analyze your budget
Your budget is the foundation for saving, and here’s some constructive advice for getting a handle on it.
First, figure out your after-tax income (which is fairly straightforward!). This isn’t always limited to your paycheck, either – consider all sources of income.
Any budget must cover all of your needs, some of your wants and – this is key – savings for emergencies and the future. Budgeting plan examples include the envelope system and the zero-based budget.
The real take-away here is to treat your emergency fund and retirement saving as a necessity, like your mortgage payment and electricity bill. (That way you don’t end up with nothing but scraps and leftovers to set aside for the future.)
Third, they suggest tracking your progress, either online or by writing down your spending and saving in a journal.
Finally, they suggest automating as much of the process as possible and revisiting your budget from time to time to make adjustments.
Be sure to take a deep look into your finances:
Rather than looking at what you’ve spent in the last two weeks, go through your bank and credit card statements from the last three to six months. Make a list of all the money you have spent. The exercise will help you create a report that you can review. See if your expenses have trended upward, and if so, evaluate the increase over time. This will give you an idea of how inflation has been impacting your total payments.
A three-to-six-month timeframe gives you more data and a better handle on trends. The same article offered a tip for reducing the expenses you can control more easily, sometimes called variable expenses:
Look for ways to reduce your variable expenses, such as eating out less or reducing your vehicle usage. Another tip: “Take advantage of discounts offered to seniors,” says Bruce Tannahill, a director of estate and business planning with MassMutual in Wichita, Kansas. “Many businesses offer discounts of 10% or more.”
That’s all savings-related. Now let’s address safeguarding your retirement savings…
2.) Ensure your retirement plan can weather a storm
This strategy is a little more complex. Even so, it’s probably worth your time, and you can break it down into easy steps. So you can start thinking about how to “stress test” your retirement.
Kiplinger’s Tim Fries explains how to stress-test your savings. The details are at the link but the crucial take-away is this:
A key component is maintaining balance between risk and reward
There are technical ways to assess this balance (Sharpe ratio, for example) but they’re beyond the scope of this discussion. The main idea is to assess your personal mix of risk and reward, and whether it’s in line with your goals.
Like everything else, don’t take my word for it! Always do your due diligence when considering rules of thumb and suggestions – after all, no one but you truly understands the specifics of your current situation, your goals, your hopes and dreams.
Even so, the next idea falls under “common sense” (or things your Grandpa would tell you) even during the toughest times…
3.) Don’t stop saving
When the economy tanks, or inflation is growing faster than your income, saving for your retirement might seem like a luxury rather than a necessity.
Don’t forget that giving up on saving today is effectively taking money away from your own future.
Furthermore, despite uncertainties about the future, there are some clear benefits that favor continuing to save today. For example, Senior Retirement Planner Ken Moraif, at the Retirement Planners of America stressed the tax benefits you can enjoy today while continuing to save for tomorrow:
If you put more money into your 401(k), hopefully you get a match (from your employer), which is free money. You get a tax deduction, potentially, which is also a subsidy.
Put your retirement savings on steroids and (max) them out.
While doing so, there’s one more angle to consider…
4.) Diversify your savings
Since the Fed has all but guaranteed that a recession is around the corner, this last strategy is likely to be the most important one to keep in mind.
We’ve covered this specific topic previously, but this is a good time to revisit what it means to diversify your savings properly.
Diversification is a powerful force! The SEC refers to it as “The Magic of Diversification.”
The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.
Are your savings diversified across different types of assets? Do they include physical precious metals like gold and silver, which have historically served as safe havens during times of economic uncertainty? Which, as commodities, have tended to hold their value despite inflation?
If you want to add a little peace of mind to your financial future, it’s easy to learn more about adding physical precious metals to your savings.
When the economic outlook is as messy and uncertain as it is today, what else can you rely on?
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating.
© 2023 Newsmax Finance. All rights reserved.