Retirees are affected by rising prices. Here is what will soften the blow

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By Jeanne Sahadi, CNN Business

As if the pandemic hadn’t been tough enough on retirees, those living on low to moderate incomes have been affected with the double financial blow of rising inflation and low interest rates.

These seniors found themselves paying more for the essentials, earning next to nothing on their savings and getting a monthly Social Security check that has only increased by an average of $ 20 this year. This annual adjustment to the cost of living by the Social Security Administration was based on the growth in inflation from the third quarter of 2019 to the third quarter of 2020.

But this rearview mirror adjustment failed to take into account the pandemic-induced spike in inflation that occurred this year. In an email survey of retirees, the Senior Citizens League found that the vast majority (86%) said their spending this year had increased by more than $ 20 per month, with 40% saying it had increased over $ 100, said Mary Johnson, the League’s social security and medicare policy analyst.

Modest income, modest net worth

Social Security benefits, which average $ 1,544 per month, are a major source of income for the majority of retirees, according to the Social Security Administration. In fact, they represent 50% or more of the monthly income of half of married beneficiaries and seven out of 10 of single beneficiaries.

For many of these retirees, the potential for earning income from elsewhere – such as savings, investments, and home equity – is modest. Seniors with an average family income of $ 29,000 a year, for example, have an average net wealth of $ 278,742, according to Boston College’s Center for Retirement Research, which based its calculations on the 2019 survey. the Federal Reserve on consumer finances. Those who earned just under $ 15,000 a year had an average net worth of $ 123,841.

In another email survey from SCL, when retirees were asked what financial changes they had made since the start of the pandemic, 34% said they had used their emergency savings while 19% said they had asked. food aid (SNAP benefits) or visited a pantry. And 19% said they had to dip more into their retirement savings than expected.

Some inflation relief may be in sight

Due to the surge in inflation this year, pension experts now expect the next cost-of-living adjustment to Social Security benefits to be the largest since 1983. The SCL and CRR all estimate two that benefits could increase by about 6%, an increase that would show up in Social Security checks next January. (The official COLA will not be announced by the Social Security Administration until October.)

But this increase may not yet be sufficient to restore the health of the elderly, for several reasons. While inflation has moderated a bit this summer, prices continue to rise.

Additionally, the cost of living adjustment may also be somewhat reduced by two factors, according to a recent CRR report.

The first is the increase in Medicare premiums, which are deducted from his Social Security check and reduce the amount owed on other essentials.

And the second is taxes, since the family income threshold that determines whether part of your Social Security benefits will be taxed is not adjusted for inflation. So, as your check grows, the risk that you will have to pay income taxes on a portion of it will also increase.

Playing too carefully comes at its own risk

As asset classes move this year, US stocks were a good place to be, having risen 100% from the lows they hit at the start of the pandemic.

But many retirees often rely more on safer investments that earn interest. Keeping money in cash and cash-equivalent assets like CDs, money markets and interest-bearing savings accounts has provided paltry growth this year, as anemic interest rates have been far outstripped by inflation, eroding the purchasing power of savers. Many bonds have also not performed well, with the S&P 500 Bond Index and most of the S&P US Treasury Bond indices trading lower since the start of the year.

Thus, for highly risk averse retirees, managing the savings they have at their disposal for maximum return is particularly tricky these days.

Interest rates are unlikely to rise until 2023, according to the Federal Reserve’s own economic projections. And the roaring stock market could be on the verge of a correction sooner rather than later.

So what is a risk averse retiree with modest means to do?

William Nunn, a certified paid financial planner who founded Horizon Financial Planning in New Orleans, recommends that retired clients have at least six months of bill payment. in liquid.

Given the low interest rates, he prefers to put that money in savings accounts rather than CDs to avoid the penalty you might incur if you have to withdraw money from a CD before you. it does not come to an end. “It’s not worth the risk of losing interest on the CD you earned and breaking it. And if you do, you might have to pay a fee as well, ”Nunn said.

Beyond money for bills and other funds stashed in a cash account in an emergency, retirees who keep the rest of their savings in bonds and cash equivalents may take more risk than they do. don’t think so, said Johnson of SCL.

“Low interest rates are taking a heavy toll on pension plans. And retirees who invest in CDs and bonds aren’t getting the kind of return they need to grow their savings and last until retirement. This means that more people need to turn to stocks and investments such as real estate. “

While this involves more risk and volatility, it can offer the best chance of beating inflation over time if you invest funds that you won’t need for five years or more at these asset classes.

While this is optimal, the goal is not for every dollar saved or invested to outperform inflation, but rather for your retirement savings as a whole to do so over time, Nunn said. “You should look at your portfolio in terms of total return. “

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