Managing the Cost of Living in Retirement

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Beyond Finance TeamPosted on Apr 9, 2018

Given our current economic conditions, inflation and cost of living increases don’t appear to be much of a threat. In fact, today we’re witnessing deflation in the price of oil and other commodities. However, history tells us that it's unlikely inflation is dead, and when planning for retirement, ignoring the effects of inflation or other cost-ofliving expenses can be disastrous.

While Social Security and most government pensions are generally tied to some type of inflation-related cost-ofliving adjustment, many other investments are not. So proactively managing your various retirement income sources makes good sense.

Consider Investment Alternatives

Early on during your retirement planning, a significant portion of your portfolio was probably invested in stocks, which most likely earned returns in excess of inflation over time. While it may be tempting to move away from equities following market losses, doing so could impact your ability to stay ahead of inflation. Nonetheless, it’s wise to diversify your investments among various asset classes based upon your risk tolerance, income needs, and age.

Make Sound Pension Decisions

If you’re covered by a pension plan, you might be entitled to choose whether to receive monthly payments during your lifetime, or a lump-sum-payment. Either option has merit based upon your personal financial needs.

Most private pension plans don’t offer cost of living increases. So, if you choose to receive monthly payouts, your monthly payments will lose value in real terms due to inflation. Conversely, most public pensions do have a costof-living feature, although there is no guarantee that future increases will keep pace with inflation.

If available, taking a lump-sum distribution and rolling it over into an IRA can be a good strategy - although any investment carries financial risks. This approach also assumes that you’re comfortable managing and investing this money, or that you have a financial advisor that can help you.

Collecting Social Security

You’re eligible to begin collecting Social Security benefits at age 62 - although taking benefits at that age will reduce your monthly payments. By waiting until your full retirement age, your monthly benefit will be 33% higher. Wait until age 70, and your monthly payment will grow an additional 35%. The increases are also prorated from year to year so if you began collecting benefits at age 64, your benefit would be higher than at age 62. Additionally, waiting longer to collect will also increase your cost of living.

Manage Fixed Expenses

Try to enter retirement with as good a debt to income ratio as possible. If you aren't using a significant portion of your income to pay a mortgage, car payment or credit card debts, you'll have more flexibility when dealing with cost-of-living increases and inflation. If you’re someone who could use some debt relief, it’s a smart idea to consider debt relief programs and figure out how to get out of debt before you retire.

Health-Care Costs

Although Medicare is available when you turn age 65, it doesn’t cover all healthcare related costs, and the cost of healthcare during retirement is often cited as an expenditure that becomes increasingly difficult to manage over time. In fact, in recent years’ healthcare costs have increased at a rate greater than the rate of inflation. Consider researching supplemental policies and prescription coverage to help with non-covered expenditures.

Minimize Withdrawals

To help counter inflation, you would conceivably need to withdraw larger and larger amounts from your retirement account just to maintain the same purchasing power. Overall, try to keep withdrawals to a minimum. Conventional wisdom in the financial planning world says that 4% can generally be withdrawn each year—but that is only a rule of thumb. In truth, you will need to manage and potentially adjust your annual withdrawals based upon factors such as inflation and investment returns.

The Bottom Line

As the cost-of-living inches up during retirement - and chances are it will - you may need to look for ways to reduce your living expenses. In the end, properly managing your investments and spending will go a long way towards ensuring a financially secure retirement.

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