How are seniors coping with inflation?

For the millions of retired seniors living on a fixed income, the surge in inflation has left many seniors at risk of outliving their retirement benefits. The rising prices of essential goods and services have forced seniors to stretch their budgets even further, forcing some seniors to find part-time work in retirement to supplement their incomes.

Seniors can cope with inflation by delaying Social Security benefits until they reach the full retirement age or later, reviewing their monthly budgets to cut off unnecessary expenses, and rebalancing their portfolios regularly. Additionally, investing in annuities with cost-of-living adjustments can help seniors plan for inflation.

What Is Inflation?

Inflation refers to the gradual increase in the prices of essential goods and services over time. It causes a decline in purchasing power, meaning that a single unit of currency may not be able to buy as much today as it could in the past.

High inflation means that the prices of goods and services are increasing more rapidly, while low inflation means prices of goods are increasing more slowly. A moderate inflation rate signifies a healthy, growing economy, and the Federal Reserve's monetary policy targets a 2% yearly inflation rate to maintain a growing economy. 

While there is a standard target rate for inflation in the United States, recent times have seen a high inflation rate. The rate of inflation reached a peak of 9.1% in June 2022, but it declined gradually to 3% in June 2023. As of March 2024, the rate of inflation in the United States was 3.5%.

How to measure inflation

The popular method used to measure inflation is the Consumer Price Index (CPI). Typically, CPI tracks the changes in prices of a basket of goods and services used by the urban consumer. 

CPI accurately measures inflation because urban consumers form about 93% of the US population. The fixed basket includes about 80,000 items commonly used by consumers, ranging from grocery items to doctor’s visit fees. After determining the current CPI, it is compared to that of a previous period to get the inflation rate. 

While CPI is the commonly used method of determining inflation, other indices can also help, such as personal consumption expenditures, CPI excluding energy and food, and personal consumption expenditures without food and energy.

How inflation affects retirement

The cost of living increases

High inflation leads to an increase in the cost of living, which can affect a senior’s purchasing power. When the price of essential services and goods such as food, healthcare, utilities, and housing rises, retirees require more income to maintain their living standards, which can strain their fixed retirement budget. 

Fixed income lags inflation

In most cases, retirees rely on a fixed income such as annuities, pensions, or social security benefits. While social security benefits have a periodic adjustment because of inflation, the adjustment can barely keep up with the inflation trend. Ultimately, the lagging adjustments to fixed income in times of inflation result in a significant decrease in purchasing power. 

Retirement savings lose value

While retirement savings and investment accounts grow over time, it is barely enough to keep purchasing power afloat. A decrease in purchasing power means that a retiree will buy fewer things with a single unit of currency than anticipated if the inflation rate remains steady.

If the rate of return on savings and investment accounts cannot keep up with inflation, the actual value of the savings declines over time. Seniors who rely on savings to cover their living expenses feel a significant impact of the decrease in purchasing power because they have to dig deeper into their savings to afford the fluctuating prices of the basic basket. 

How to plan for inflation 

With the rising rates of inflation, there are several things seniors can do to maintain the desired standard of living. They include:

Delay claiming Social Security

While you can access Social Security benefits as early as age 62, delaying claiming benefits until you get to the full retirement age or reach 70 will increase your overall benefits. Generally, the longer you delay claiming benefits, the greater the monthly checks you will receive. Social Security benefits increase by 8% per year until you reach 70. However, there is no benefit of delaying benefits beyond age 70.

Review your spending

Reviewing your spending regularly can help you stay ahead of inflation by eliminating unnecessary expenses. Check any recurring expenses that you no longer need to help you save an extra dollar. For example, review your cable payment, phone bill, and insurance expense to determine what to eliminate or reduce. You can also take advantage of senior discounts to lower your expenses like groceries, phone bill, and TV subscription.

Review your budget

Revisit your budget to check what expenses to adjust or eliminate to avoid spending more than you have budgeted for. You can decide to eat at home instead of eating out, or postpone your upcoming vacation to a future date. A budget review can also help you allocate more money to maintain the desired living standard.

Rebalance your portfolio

A well-balanced portfolio is one way to keep assets growing during inflation. You can start by evaluating your risk tolerance and identifying the portfolios that require re-allocation based on your investment goals. Inflationary periods are unpredictable, and taking strategic investment allocation measures can help you live comfortably off your fixed income and prepare for the future.

Consider the role of annuities

Adding a retirement annuity can be an excellent way to cope with inflation. Consider investing in an annuity with reasonable cost-of-living adjustments to cover periods with high inflation. Additionally, annuities provide a stream of income over your lifetime, even if the money you contributed is exhausted.

Consider a reverse mortgage

Retirees who own homes can get a reverse mortgage and tap into their home equity to help offset the effects of inflation. A reverse mortgage provides a lump sum or a monthly income, hence providing another source of money to help seniors meet their living expenses and afford large payments.