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By Faron Daugs, CFP

The pinch of inflation has hit household budgets profoundly. With inflation spiking to decades-high rates, the rising costs of putting food on the table – our most fundamental need has become one of the most visible pain points in this era of surging prices. These short-term financial shocks can challenge our assumptions about how much we need to save for a comfortable retirement, leaving many people considering what adjustments to make to their spending and savings habits to ensure they are still on track.

Faron Daugs is a Certified Financial Planner and Wealth Advisor with more than 30 years of industry experience. As the founder and CEO at Harrison Wallace Financial Group, he serves as a go-to source and trusted advisor for his clients. To learn more visit https://www.harrisonwallace.com/ or follow Faron on LinkedIn.

Faron Daugs

These are big questions with broad significance. People in retirement are now trying to make a fixed income stretch further. Those nearing retirement may be considering adjusting their plans or even delaying retirement. And those who still have time to save may be struggling to balance the higher costs of living and longer-term savings objectives.

Whether you’re still accumulating retirement savings or you’re in retirement trying to make your nest egg last, now is a good time to re-examine your budget and financial plans in light of the recent rise in costs.

Planning for the costs of retirement

To ensure that you do not outlive your retirement savings, you will need to estimate your future cost of living, then put a plan in action that gives you the best chance to reach your savings goal. Unfortunately, there is no one-size-fits-all answer to the question of how much you should save for retirement. Calculating the amount needed for retirement requires a personal estimate of how much you will spend, or would like to spend, on a monthly or annual basis when you retire.

To create an estimate of your retirement needs, you can start by centering your projections around the costs of your current lifestyle, with adjustments made based on how that lifestyle may change. For instance, a young professional who has not reached the peak of their earnings potential may want to create a plan with the assumption of a more comfortable lifestyle in the future than what they can currently afford. Conversely, a couple supporting three children, saving for college, and paying down a mortgage may need less in their monthly budget once they retire.

You may want to separate costs into fixed expenses, such as utilities, property taxes, and groceries, and variable expenses, like vacations, hobbies, car purchases, and health care costs. Keep in mind how your health care costs may change as you age, and without the benefit of employer-sponsored health care.

Begin calculating these expenses in “today’s dollars.” Then, once you have an estimate, you will need to factor in the impact of inflation on those expenses. While current events demonstrate that inflation can ramp up quickly, a longer-term view puts inflation at an average rate of about 4% per year. When calculating how much you’ll need to save to cover your monthly expenses, you will want to assume a conservative return on your investments in retirement. Additionally, be aware that inflation doesn’t end when you begin retirement withdrawals. You will need to account for inflation during your retirement years to avoid losing your purchasing power.

Accumulating retirement savings

Once you have a savings goal, you can turn your attention to the more important task of maximizing your potential to reach your goal. An accurate retirement estimate means very little with poor execution in accumulating the savings. Give yourself the best possibility of achieving your retirement on schedule with prudent personal finance steps, such as:

  • Begin a savings plans early – Starting to save for retirement as soon as feasible, even if the contributions are small, serves two important purposes – you will benefit from the power of compounding and build the habit of savings. 
  • Invest in tax-deferred accounts – Both Roth and traditional IRAs allow your investments to grow with tax advantages, increasing the effect of compounding on your balances. Additionally, traditional IRAs and 401(k)s allow for tax-deductible contributions, though withdrawals will be taxed. For Roth 401IRAs and Roth 401(k)s, contributions are not tax-deductible, but qualified withdrawals are tax-free. If unsure which may be most beneficial, consider splitting your contributions between traditional and Roth accounts. 
  • Maximize employer benefits that help you save – Taking advantage of employer-matched contributions to your 401(k) or similar retirement account can accelerate your retirement account growth. 
  • Understand the impact of inflation on your goal – While the current surge in inflation will end at some point, even a normalized rate of about 4% will have a meaningful impact on your future cost of living. 
  • Review your financial plan regularly – Review and adjust your retirement plan at least every two years, and more frequently as that goal becomes closer. 
  • Connect with an adviser – A financial adviser can walk you through the planning process, monitor your progress regularly, and help keep your plan on track as you face significant life events.

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Choosing the right investments

Ideally, we all would prefer to select investments with the highest rate of return. However, asset classes with higher return potential also bring higher risks and volatility, so it’s important to consider your time frame and risk tolerance when choosing your investment allocations. At a minimum, you’ll want to select investments that will grow faster than the rate of inflation to ensure the value of your savings does not erode over time. Achieving a solid return is usually possible with a well-balanced portfolio of investments diversified across multiple asset classes, a strategy that reduces risk and helps even out volatility.

  • Mutual funds and ETFs – Choosing a mix of low-cost index funds that invest in stocks and bonds will provide diversification without high costs eating into your return. For an all-in-one solution, a target date fund/ETF can simplify this choice and offer asset allocation that may be best for your investment horizon. 
  • Annuities – If you are nearing or in retirement, the single premium immediate annuity (SPIA) is a good potential source for immediate fixed cash flow. In an SPIA, you pay a lump sum up front and receive a guaranteed amount of income over a selected timeframe, or for life. Because of low interest rates in recent years, SPIAs – which rely on underlying investments in U.S. Treasuries and low-risk bonds – have not offered compelling rates of return. However, with interest rates on the rise, SPIAs are worth considering for people who want a steady income at a low cost. The purchase of an SPIA can be made by converting a retirement account, while people who own a deferred annuity can create guaranteed income upon annuitization of their contract.

    If you are still accumulating retirement savings, variable annuities with living-benefit features can play a role in generating returns and providing retirement income. Living-benefit features can guarantee a minimum income or return but come at additional costs. When evaluating variable annuities, it is important to consider the fees, which can be high, as well as any guaranteed return, which may not outpace inflation; however, absorbing the costs for a guarantee may be worth the peace of mind for some. 
  • Stocks and bonds – Buying a basket of stocks in high-quality, dividend-paying companies that may provide greater potential upside. Individual bonds may also be appropriate for certain investors. Investors who can build a “bond ladder,” or a series of bonds that mature at different times, can benefit from the stable income that a bond ladder provides. Investors unfamiliar with trading stocks and bonds can work with a financial advisor to ensure suitable investments.

Making retirement savings stretch

Ultimately, whatever you can accumulate before retirement must last. The good news is that most people have modifiable lifestyle factors that can influence their rate of spending. Simple lifestyle changes can have a large impact. Forgoing that next-generation phone upgrade, luxury items, canceling subscription services, revisiting travel plans to stay close to home, and taking advantage of local entertainment are all good options to save in retirement. During this latest spike in grocery costs, many grocers have emphasized their offerings for price-sensitive shoppers through coupons and loyalty programs, so take advantage of your store’s programs and local ads. It can also be helpful to maintain some flexibility in your food choices.

The recent rotation to remote work and the gig economy has created more opportunities for retirees to re-enter the workforce on a part-time basis when belt-tightening falls short. Working in some capacity can also help maintain a sense of social connection and well-being. If you are taking social security benefits before full retirement age, just be aware of how any earned income impacts your social security payments (earned income below $19,560 per year has no effect).

Maintain a long-term view

Short-term volatility can often lead to panic and poor decision-making. Revisiting and revising plans is advisable in a market like we are seeing now – but knee-jerk reactions, like trying to time the market to preserve balances or squeeze out a higher return, usually don’t pan out. Remember that markets historically eventually shift and return to growth cycles. Seek out the help of a professional if you need additional resources for planning out and succeeding in your retirement.

About the author: Faron Daugs

Faron Daugs, CFP®, wealth advisor, founder & CEO at Harrison Wallace Financial Group, serves as a go-to source and trusted advisor for his clients for over 30 years. To learn more visit https://www.harrisonwallace.com/ or follow Faron on LinkedIn.


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