Worried About Outliving Your Money in Retirement? How to Combat Inflation
Key Takeaways:
- Inflation is a long-term threat to retirement security
- Retirees need a strategy—not just savings
- The “bucket strategy” helps manage retirement income
- Growth investments are still necessary in retirement
- Retirement can last 30+ years—longer than your working life
- Worrying about outliving your money in retirement could be reduced with a plan
Worried About Outliving Your Money in Retirement? How to Combat Inflation – Links
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Relevant Wall Street Journal article providing inspiration for the post (paywall)
Worried About Outliving Your Money in Retirement? How to Combat Inflation – Transcript
There are lots of folks who worry about outliving your money in retirement.
Some people take this to a whole other level.
They take it to an extreme, and they never seem to enjoy themselves in retirement. They worry constantly. They fret over every single news headline that comes out every day. The market is down, and they’re wringing their hands about what could possibly go wrong.
They’re always concerned about how “things were better back in the day,” and how “things just cost more today.”
And these are folks who often work their butts off for 40 years, sometimes longer.
They, these people, were usually pretty diligent about keeping their costs low, keeping their expenses low, and socking money away for retirement.
You know, in a lot of these cases, these were also folks who really didn’t spend lavishly. They didn’t take big trips, they didn’t buy fancy cars. They just worked.
And you probably know some people, or you probably recognize people like that.
Let me know, in the comments if you recognize someone like that.
Should retirees worry so much about inflation during their retirement?
Well, in the near term, the answer should be no.
Over the longer term, the answer should be absolutely.
I want to walk through a couple of numbers with you. The average inflation rate for the past a hundred years hovers around 2% per year.
There’s going to be periods – like we had in the seventies – where the rate of inflation was higher for long periods of time. And then we get these pockets, where, like 2022, where the rate of inflation in the United States was 8%.
But there’s also periods of time where the inflation rate stays below that 2%.
2% is an average. It’s not a straight line.
We had years like 2013 where we had 1.5%,
2014, 1.6%,
2015… we had nothing. The rate of inflation was 0.1 One-tenth of one percent.
2016, 1.3%.
And the target for the Fed, the Federal Reserve, at the time was they wanted to get the rate of inflation UP to 2%.
Now they want to get the rate of inflation in 2025 DOWN to 2%.
They want to stick with something. That, a long-term number that they can stick with, and 2% seems to be the target.
When we build plans for clients, we want to use a higher rate than that, to sort of “stress test” your plan – to see if it will work.
And we will use a much higher rate of inflation for any expenses that clients have that are healthcare or medical-related.
So I just want to go through some basic “back of the envelope” math with you.
Let’s say your retiring in 2025 and the monthly expenses you outlined for us, during data gathering, you outlined that your monthly expenses run about $8,000 a month.
Well, if we’re using a two and a half percent inflation rate per year, and again, we’re just doing back of the envelope, straight line math.
Then, in 10 years, your $8,000 a month amount of expenses… applying a two and a half percent rate of inflation is going to be almost $10,000. It’s $9,990.
When you do that, you’re talking about your needs being, you’re going to need $24,000 a month (a year!) more, 10 years from now than you have today. That’s just to make expenses, just to make ends meet.
Over a 20 year period of time, that $8,000 a month is now going to cost almost 13 grand. It’s going to be $12,800 a month.
And that’s just using a straight line, two and a half percent rate of inflation.
So 20 years from now, you’re going to need almost $58,000 a year more than what you’re expecting.
And that’s just to stay, stay even.
These are ballpark estimates and we’re using straight line math, but we want to illustrate how much, how different, the numbers can look over a longer period of time.
Now, we have some folks that retire in their fifties. A lot of them retire in their sixties. But you’re talking about folks that, if you retire in your fifties, you could be retired longer than you were actually working.
And if you retire say at 65, there’s a possibility that you could be retired for 30 years. That takes you to 95. Maybe 35 years?
Of course it could be shorter. But you have to provide for long periods of time.
Now, we employ what a lot of folks in the industry call a “bucket” approach.
We have three buckets that we put together for our clients when we’re planning for them. And the reason we have these buckets, you’ll see over the next few moments.
The reason why we have these buckets is because we don’t want to be caught in a spot where we have to sell investments, growth investments, when the market is sloppy or the market’s been down for a while, and then we’re selling things at a loss.
So we have a near term bucket, an intermediate term bucket, and a longer term bucket.
The sizes… and I want to stress this… the sizes of each bucket depend really on our conversations with you.
We work together to decide how much should we have in that near term bucket.
How much should we have in the intermediate term bucket?
How much should we have in the long term bucket?
The near term bucket covers your expenses for the next year, or maybe the next two years.
Or in some cases, three years.
We want to make sure that this money is invested in things that are not very volatile, that are liquid, that you can get your hands on to cover your monthly expenses. And so we don’t want to be taking large risks with that kind of money.
So, the market can do really whatever the market is going to do.
And we know that your expenses are covered for the next year, or two, and in some cases three years.
The intermediate term bucket is going to take a little more risk, but we don’t wanna flat out “swing for the fences.”
So we want to have this because this is going to be the next level moving down. Once we drain the first bucket, the near term bucket, what we have in the intermediate term bucket then moves down into the near term bucket.
So, we want to make sure that this money is, uh, a little more, have a, have some kind of volatility, but not a lot.
We want to make sure that it’s liquid.
We want to know that in the next 2, 3, 4, 5 years, this money is going to be ready to meet your expenses.
And then we should always have some money in a long-term bucket.
This IS the bucket that is designed for growth. And I know people retire and they say, “I don’t want any more risk!”
You have to have some kind of element of risk in your investments.
That’s the only way you’re going to be keeping up with inflation.
It’s important to realize that keeping up with inflation, I mean, you’re going to retire, you’ll get social security, hopefully, and there’ll be some type of annual adjustment, cost of living adjustment that doesn’t always keep up with inflation.
If you have money in annuities, or money from a pension plan, you may be getting monthly, uh, a monthly income from that.
Most of these plans, many of them at least, don’t have some kind of escalator, or way to increase in the future with inflation.
That’s a problem.
You do need to have some money that’s invested to help keep up with inflation.
This can help you in an effort to not be outliving your money in retirement.
So should you have 100% of your money inequities? Probably not.
We don’t see too many cases of that.
You want to have money allocated using at least we endorse using the bucket approach, so that you’ve got money to meet your short term needs, your intermediate term needs, and then we do have money that’s going to help keep you – or try to keep – up with inflation and not be outliving your money in retirement.
