Retirement: How to brace for rising inflation

Yahoo Finance Video
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Michael Finke, Professor and Director of the Granum Center for Financial Security, The American College of Financial Services, joins Yahoo Finance Live to discuss inflation's impact on retirement plans and Social Security, price increases in consumer-facing sectors, and accessing Social Security before retirement.

Video Transcript

- Welcome back. Well, inflation is making it harder to save no matter what your age. But for those nearing retirement, finding ways to offset its impact is crucial. Here with tips is Michael Finke, professor and director of the Granum Center for Financial Security in the American College of Financial Services. Michael, thank you so much for joining us today. How well-equipped are seniors to fight off surging inflation? I know there's been a cost of living adjustment, a quite sizeable one, the biggest in many years. But that's not sufficient to fight off what we're seeing as far as rising prices.

MICHAEL FINKE: Well, and remember, that's only in their Social Security that they get an increase in the amount of income as a result of the increase in inflation that we've seen over the last year. For the rest of their investments, the news is actually not so great because they're not able to produce as much income from their investments, whether it be dividends from their stock investments or interest from their bond investments. Seniors are getting about a third of what they got as recently as 1994 from an investment portfolio that's balanced between stocks and bonds. So they're getting less income. And what they're buying is costing more.

- Yes, that double-edged sword, right? So then how can retirees with limited income protect themselves, protect the money they do have, from these rising prices?

MICHAEL FINKE: Well, first of all, this is a very sort of idiosyncratic inflationary market right now. And what I mean by that is that there's just a few categories that have gone way up in prices. That would include energy-- specifically, petroleum energy. Cars have gone up in price. We've seen red meat also go up in price. I mean, it's, like, the worst situation for a man.

So what we can do is we can be a little bit more judicious about how we spend money. We can spend money on categories that haven't risen as much. And for a lot of seniors, they do have more flexibility. If everything was rising by 7%, that would be a different situation. But we've seen a number of categories that really haven't risen much over the course of 2021. That's evidence that this is more of a supply chain issue. And seniors, unlike workers, who have to pay money for gasoline, have to buy new cars-- workers are less flexible than seniors are. So seniors can be a little bit more flexible.

I'm a big fan of delaying Social Security as a way of getting more inflation-protected income. This is something I think a lot of people don't think of enough. And that is that when you delay Social Security, and you can get as much as 8% more income if you delay it from, say, 67 to 68-- that is inflation-protected income. That is going to go up in years where inflation is higher.

The other thing that you can do is consider investing in I bonds now. So a couple can invest $20,000 in I bonds. And those are also inflation-protected investments. They're what we know as a perfect hedge against a rise in prices for seniors in retirement.

- You know, that lies in the face of the great retirement, where you see people close to retirement saying, we want out now. You're saying, hold off before you claim Social Security, stay in the labor market, perhaps, a little bit longer. Anecdotally, what are you seeing from people who are close to retirement? How worried or concerned are they?

MICHAEL FINKE: You know, I don't see a whole lot of concern. And I'm going to address that point that you just made because I think that's also a very important one. You don't have to claim Social Security when you retire. You can choose to retire. You can pull money out of your 401(k) to fund your lifestyle. But you can continue to defer Social Security as a way of increasing your inflation-protected income.

So don't necessarily conflate retiring with claiming your Social Security. You can hold off on that. And in fact, that can be a very wise strategy as a way of managing the amount of taxable income that you get from your IRA savings, the defined contribution plan that you transfer into an IRA in retirement. So give yourself a certain amount of flexibility when it comes to spending, but also when it comes to where you're deriving your income in retirement.

- Any other tips on how we can save money in retirement in addition to those I bonds, which is definitely a viable option for some?

MICHAEL FINKE: Yeah. I think, you know, historically, stocks have kept pace with inflation. So taking a certain amount of investment risk makes sense. But also be aware that if the Federal Reserve does go into a contractionary policy, where they're raising interest rates, where the money supply is going down, that tends not to be so great for stocks. So don't necessarily rely on taking more risk as a way of bailing yourself out. But be prepared for the possibility that prices could rise. That's an added portfolio risk. It hasn't happened in a long time. But I think it may rear its ugly head in the next decade.

- OK. And then a lot of companies, on the flip side, taking matters in their own hands to sort of help retain staff and help with retirement, contributing more to their 401(k)s. We will have to leave it there. Michael Finke, professor and director of the Granum Center for Financial Security, the American College of Financial Services, thanks so much for your time.