Though inflation has eased from the highest CPI point of 9.1% in June 2022, it remains around 3%, and prospective retirees are thinking about how to maximize their savings to cover future expenses.
Transcript:
CONWAY GITTENS: Inflation, I think that’s a, I don’t want to say a big problem, but a major concern for retirees currently and for people who are close to retirement. We’ve got an inflation rate, what, around 3% right now. What’s your best strategies for dealing with inflation?
BOB POWELL: Yeah so I mentioned earlier that inflation is one of the big risks that you’ll face in retirement. And one of the few ways that you can manage, mitigate that risk is to make sure that you’re investing in equities, which a history of keeping pace with inflation. The other things that you might consider would be things like I-bonds, which also keep pace with inflation, as well as something called Treasury Inflation protected securities, which are also designed to help people keep pace with inflation and offer a little bit more security than, say, equities. So have a mix of investments that are designed to keep pace with inflation. And I’d say that at a minimum will help you. The other is to be conscious of your expenses. And, you know, people are complaining today about automobile insurance, right. So maybe one of the things that you do is increase the deductible. Et cetera. Et cetera. So be very, so start thinking consciously about what tend to be considered essential expenses, but might have some wiggle room. I know, for instance, I’m one of the troglodytes in this world that still has cable. And I, and I know I should cut the cable. I haven’t. But I know that if I get to retirement, I’ll probably know that I need to cut the cable in order to reduce my entertainment line item in my retirement budget. So, you know, there’s things you can do on the saving and investing side, and then there are things that you can be doing on the expense side to manage and mitigate the risk of inflation.
CONWAY GITTENS: So we’re heading into the second half of the year. Should we be tweaking our portfolio, giving inflation expectations and Fed expectations? I mean, when we’re coming into the year, you know, people were expecting three, four rate cuts. It doesn’t look like we’re going to get 3 and 4 rate cuts. So should investors, retirement investors be looking at making some changes on the margin?
BOB POWELL: Yeah so I always say two things should be your guide. One, if you’re saving for retirement, you should have, if you don’t, an investment policy statement, a blueprint for your investments. And that blueprint would say, for instance, I plan to invest 60% in stocks, 40% in bonds. And if at any point in time throughout the course of the year, the stocks go up to 65% or they go down to say, 55% or below, I’m going to rebalance. And that rebalancing could be because interest rates have gone up, or because the market has crashed or the market has gone up. But without that investment policy statement in place, you’re sort of just acting, you know, to the whims of the market, to the whims of the election cycle, to the whims of the inflation of the interest rate cycle. So first and foremost, if you’re saving for retirement, create an investment policy statement and then set what are called bands by which you would dictate when and how you would rebalance your portfolio.
On the other side, if you’re in retirement, what you need is a retirement policy statement that says, this is how I plan to withdraw money, this is how I plan to monitor my withdrawals. This is how I plan to monitor my investments. This is how I will adjust my withdrawal rate and how I’ll adjust my asset allocation in retirement should x, y, z happen. And again, you don’t want to be sort of reacting to the news. You want to have a proactive plan in place. And I think, what’s the famous saying that Eisenhower said before d-day, which was, planning is everything, right? So without planning for these potential circumstances, and I like to think about it when I’m planning for these circumstances, I like to think about it in three ways, which is to create not just one plan, but to create three plans, a best case scenario, a worst case scenario, and a probable case scenario. So at least then you’re working with if I’m outside of, say, one standard deviation of something happening that could be for the better or for the worse, I know what I’m going to do. I’m not going to just react to news that the Fed has decided not to lower interest rates or that the stock market has crashed by 10% or 15% or 20% I have a plan in place, so that’s critical for folks. If you don’t have one, get an EPS and a retirement policy statement.
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