If you have filled up your gas tank or bought the family groceries it has been hard to ignore the rising prices.  This has spilled over to many consumer and household goods as well due to strong demand and continued bottlenecks in the supply of goods and labor stemming from the pandemic.  To put things in perspective, 2021 finished the year with a 7% increase in the Consumer Price Index (CPI)[1] or the largest such increase since 1982.  The CPI reading is considered a standard measure of overall inflation in the United States.     

Even the local real estate market has been impacted as folks from all over the country look to relocate to Tennessee due to our more affordable living and low taxes.  Private investors have gotten into the game as well to quickly buy up housing inventory.  I have seen an increasing number of families viewing their home as an investment and trying to time the real estate market by selling their property at what they consider to be an exorbitant price and buying another home when things cool off.  Who really knows when and if the housing market normalizes from here or if this is the new normal?   

While this can be cause for concern if you are planning for or in retirement, we believe it is important to look past the headlines and take a level headed approach should higher inflation persist or even go up in the future.  Below are some strategies you may want to consider to protect your lifestyle in retirement.

Consider Delaying Your Social Security Benefits

The silver lining when it comes to the inflation we experienced in 2021, is that most retirees will be getting an increase in their monthly income due to the Cost-of-Living Adjustment (COLA) built into their Social Security benefits.[2]  This will increase the gross monthly payment by 5.9% or about $59 for every $1,000 in benefits.  There was also an increase in the Medicare Part B Premium which is deducted from benefits.[3]  Overall, this should result in a noticeable increase to one’s Social Security benefits. 

Because Social Security has some inflation protection built-in, it may be a smart move to consider delaying this benefit until your Full Retirement Age or beyond to maximize the overall benefit.  One can delay their Social Security benefits from age 62 to their Full Retirement Age (FRA) and beyond up until age 70 if they choose.  For each year you wait past your FRA there is an 8% increase in your benefit.[4]  Getting the largest benefit can prove very favorable over a longer retirement especially if inflation remains unchecked.  We have found that making better decisions with your Social Security can increase your retirement income by $100,000 or more over your lifetime and improve your overall financial security.  Below is a case study example illustrating various timing of Social Security benefits in the table below.[5]  Mileage will vary based upon your situation. 

Delaying your Social Security doesn’t mean you have to delay retirement if you have other resources like retirement accounts, pensions, annuities or plan to work part-time for a number of years.  If you determine that delaying Social Security makes sense, having a financial plan that includes some “Bridge income” is crucial.

Avoid putting too much of your Nest Egg in the Annuity basket

As was discussed in a previous blog, annuities are neither good nor bad.   They are simply another tool in the retirement toolbox that can be used to accomplish specific goals such as receiving a pension-like income, providing safety of principal, getting a fixed interest rate or accomplishing a goal for wealth transfer through a death benefit. 

The most important thing to understand about annuities is that they are designed to be long-term instruments.  If you are ok with the tradeoffs (limited access without penalty, potentially higher fees, lower growth potential) then they can definitely make sense as part of your financial plan.  If you lock away a significant amount of your assets and we have unexpected inflation it may limit your flexibility.  It is generally good advice to put no more than 50% of your investable assets into annuities.  If you are using an annuity to provide a monthly income for yourself, it is important to select one that gives you the option for a COLA or have a plan to draw the difference from your available savings.      

Add Bond Investments that Protect from Inflation

Bank deposits, cash and bond investments typically do a poor job of overcoming inflation.   While we still think they play an important role in providing stability and a source of money in volatile markets, you should consider adding other investments that may do a better job of overcoming inflation. 

While still considered to be bond investments, Treasury Inflation Protected Securities also known as TIPS can give you some additional diversification and an advantage amongst your bond holdings in a higher inflation environment.  These are Treasury Bonds issued by the US government that provide a fixed interest rate plus an adjustment on their par or maturity value tied to the annual inflation rate.[6] 

A close cousin of TIPS would be Series I Savings Bonds or I Bonds.  These provide a fixed return at issuance plus a variable rate tied to inflation.  As of this writing, I Bonds provided a variable rate of 7.12%.  Not bad for an investment backed by the US Treasury!  Additionally, the interest on these bonds is tax-deferred until they are redeemed.  They make a good place to park some of your cash if you have too much on deposit at low rates.  The main downside is that if inflation were lower than expected, you could earn a lower than market rate based upon when you purchased the bonds.  Luckily you can redeem I Bonds 12 months after purchase (interest penalties may apply if redeemed before 5 years).  They can only be purchased in limited amounts each year directly through the US Treasury and you will want to make sure you keep good records of your purchases and/or assign beneficiaries so monies squirreled away don’t slip through the cracks when considering estate planning. 

Consider Real Estate Ownership

In addition to your investment portfolio growing over the past few years, investors have likely seen one of their largest assets, their home go up in value significantly.  While rates of growth will vary by location, this can provide you some level of inflation protection. 

Home ownership can give you the benefit of having a fixed housing cost in retirement.  Conversely, rent and lease rates tend to go up with the cost of living and this can be problematic if you are living on a fixed income.  It is important to make sure you factor in your home maintenance and budgeting 1-2% of your home value each year for home maintenance will help you avoid becoming house poor in retirement.

If you are handy and want to generate more passive income for yourself, retirees can consider rental real estate or flipping properties.  For those that are inexperienced or prefer to delegate, a good property management company can be well worth the investment to vet tenants and help maintain the property.   Even for those experienced real estate investors, it is important to remember that risk and reward are related and that property values and rental income is not guaranteed. 

For those that prefer to be more hands-off you can also add exposure to investment real estate through Real Estate Investment Trusts or REITs.  These are companies that invest primarily in real estate, often commercial real estate.  As they generate passive income through the rent payments that are collected, the earnings are passed through as dividends.  To qualify as a REIT, the company must pay out at least 90 percent of its taxable income annually in the form of shareholder dividends.[7]  In addition to the potential dividend income, REITs can benefit if their portfolio of properties or their share price goes up in value.  The flip side is that their prices can drop as we most recently saw happen in 2020.  Having broad exposure across multiple industries and locations in a well-managed REIT fund often makes the most sense to reduce your risk. 

Conclusion

While inflation has been rising, it is important to stay grounded and focus on what you can control as it relates to your financial plan.  Delaying your Social Security benefits, staying flexible by limiting exposure to annuities, and properly diversifying your investment portfolio and balance sheet can help you meet the challenges that inflation presents.  As Roger often points out, our advisors are here to help advise you on everything in your life that money touches not just your investments.  Until next time!

[1] Source:  US Bureau of Labor Statistics

[2] Source:  Social Security Administration

[3] Source:  Medicare.gov

[4] Source:  Nerdwallet.com

[5] Source:  Case Study Financial Plan for Mike and Carol Brady from MoneyGuideElite. 

[6] Thebalance.com: How Treasury Inflation Protected Treasuries Work

[7] www.sec.gov (REITs)

Disclosure

Visionary Horizons, LLC nor any of its representatives provide tax preparation or advice.  Please consult with a tax professional prior to implementing any strategy.  Registered Investment Advisory Services are custodied at Schwab Institutional, a division of Charles Schwab & Co., Inc. (“Schwab”) Member SIPC., TD Ameritrade Institutional, a division of TD Ameritrade, Inc. (“TD Ameritrade”) Member SIPC. 

Securities offered through Purshe Kaplan Sterling Investments, member FINRA/SIPC, Headquartered at 80 State Street Albany, NY 12207. Purshe Kaplan Sterling Investments and Visionary Horizons, LLC are not affiliated companies.

NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY

Nick Hughes, CFP®
Nick Hughes, CFP®
Nick Hughes, CFP® is a Wealth Advisor with Visionary Horizons, LLC, a Registered Investment Advisory Firm in Chattanooga, TN.  Nick has been helping retirees and widows simplify their financial lives and develop more clarity about their future since 2007.  He has contributed to articles for Market Watch and FinancialPlanning.com and is a regular contributor to the Visionary Horizons blog.