For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.
That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. Inflation spiked 7.5% in January 2022, the highest annual increase in 40 years.
Two-thirds of older Americans are worried that inflation will negatively impact their inflation, according to a survey by American Advisors Group. However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.
Related: How much money should you put toward a 401(k)?
What Is Inflation?
Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living including, such as gas for your car, groceries, home expenses, medical care and transportation. Inflation may occur in specific segments of the economy or across all segments at once.
There are multiple causes for inflation, but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.
When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.
When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.
Concerns about inflation may even push back the age at which some people think they can afford to retire.
How Can Inflation Impact Retirement?
Inflation eats away at the value of each individual dollar, including savings and investments, so it’s important to keep in mind the inflation rate for retirement planning. There are several strategies you can use when investing during inflation.
For those saving for retirement, it’s important to keep in mind that the cost of living in the future will be higher than it is today. For example, if rent costs $1,000 today but next year if there’s inflation, that cost could rise to $1,100. Over a decade or more, that price could double or triple.
5 Ways to Minimize the Impact of Inflation on Retirement
While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the risk of inflation.
1. Invest Your Savings in the Stock Market
Investing in stocks is a great way to fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been roughly 13%. Even when inflation is factored in, investors still have substantial returns when investing in stocks.
However, stocks are risk assets, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement, so retirees tend to allocate a smaller portion of their portfolio to equities to manage market risk.
One way to potentially determine the percentage of a retirement investment portfolio that should go towards stocks is to subtract your age from 100. For example, if you are 70 years old, a 30% allocation toward stocks may be suitable, but this can range depending on your risk tolerance and other sources of income.
2. Use Tax-Advantaged Retirement Vehicles
One of the ways retirees can increase their purchasing power is to reduce the amount of their money they need to pay in taxes. For example, a traditional 401(k) retirement account is not taxed until money is withdrawn from it.
Tax-advantaged retirement accounts are beneficial for retirees because the money grows tax-free. In 401(k)s and most Individual Retirement Account (IRA), you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket. With Roth IRAs, you’ll pay taxes on the money you put into the account, but it will be tax-free in retirement.
3. Do Not Over- Allocate Long-Term Investments With a Low Rate of Return
Risk averse investors may be tempted to stay invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower risk investors take, the lower the reward. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.
While they offer a guaranteed return, for example high-yield savings accounts typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.
That’s why even retirees may want to keep a portion of their investments in the stock market.
4. Buy Inflation-Protected Securities
Treasury inflation-protected securities or TIPS are backed by the federal government and help protect investments against inflation. The principal value of the investment increases when inflation goes up and if there’s deflation the principal adjusts lower per the consumer price index.
TIPS have fixed coupon rates based on the principal value of the investment. When inflation increases, the value of the principal rises and the coupon payment will increase. Investors consider these bonds among the safest investments because they are issued by the U.S. Treasury and backed by the full faith of the U.S. government.
5. Buy Real Estate
Retirees may also consider investing in real assets. Real estate is often a good inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it can also increase in value. One of the daily costs impacted by inflation is the cost of housing.
That’s why rental income from real estate historically has kept up with inflation. Investing in real estate as a real asset or even in real estate investment trusts (REITs), can be a great way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income.
Inflation Calculator for Retirement
It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator, like this one from the Department of Labor, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.
The Takeaway
While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments aimed at minimizing the impact of inflation can help. Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.
FAQ
Is inflation good or bad for retirees?
A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings.
How can I protect my retirement savings from inflation?
There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS, real estate, and investments that provide a high rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).
Does your pension increase with inflation?
Some pensions have a cost-of-living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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What happens to your debt when you die?
Do you know what will happen to your debt when you die? Some debts are forgiven while others may be passed down to heirs. Read on for the answers to some of the most frequently asked questions related to death and debt.
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In order to accurately answer this question, we need to examine the most common types of debt people accumulate. In other words: Not all debt is equal. The type of debt you have and when you accumulated the debt will determine how and if your debt is passed on to others when you die.
The Most Common Types Of Debt
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If you die with credit card debt, there are two things that may happen:
- Your debt may be forgiven and written off by the credit card company
- The debt will be passed on and the responsibility of a survivor
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If you are the sole owner of the debt when you die, (not married or a cosigner) the credit card companies will be involved in the probate process. The money left in your estate, any retirement accounts, or other items worth money will be sold and the outstanding debts will be paid.
If there is not enough money in your estate to pay off the remaining credit card balance, your children or beneficiaries will not be required to pay the remaining balance. The outstanding debt will be “forgiven” by the credit card company.
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If the credit card is a joint account with a living spouse or a cosigner, the other account holder will be responsible for the debt. If you have authorized users on the account but they are not the account owner, the users will not be responsible for the debt.
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This is one of those myths that continues to live on. Credit card debt does not go away after seven years. The confusion with the seven-year time frame comes from the credit report time requirement.
After seven years, old debts begin to fall off of your credit report. Your debt, however, is still very much alive and owed. Lenders can and will continue to pursue the amount owed until it is paid, settled, or charged off. Do not be fooled into thinking your credit card debt will go away after seven years.
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The quick answer? It depends. There are several factors that determine if a deceased spouse’s credit card debt will be passed along to the surviving spouse. If the credit card debt was incurred before marriage and the deceased spouse was the sole owner of the account, in most cases, the debt will not be the responsibility of the surviving spouse.
If the credit card debt was incurred after marriage and the deceased spouse was the sole owner of the account, the state you live in determines the surviving spouse’s responsibility. If you live in one of these community property states and the debt was incurred after marriage, the surviving spouse is responsible for the credit card debt of their spouse regardless of the account ownership:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
If you do not live in one of these states, generally the surviving spouse will not be responsible for the credit card debt if they were not a joint owner of the account. If you are a joint owner on the account, you are now solely responsible for the debt.
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Again, where you live determines what can happen to your medical bills when you die. Generally speaking, children and heirs will not be required to pay back the outstanding medical bills of their parents. With that being said, there are a couple of instances where a child could be responsible for the medical debt of their parents.
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When a child cosigns admission paperwork acknowledging financial responsibility if the adult is unable to pay their bills, this debt may be passed down to the child.
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There are 26 states that have filial responsibility laws that state a child may be responsible for a deceased parent’s medical debt in certain situations. The states that have filial responsibility laws are:
- Alaska
- Kentucky
- New Jersey
- Tennessee
- Arkansas
- Louisiana
- North Carolina
- Utah
- Indiana
- Nevada
- California
- Maryland
- North Dakota
- Vermont
- Connecticut
- Massachusetts
- Ohio
- Virginia
- Iowa
- New Hampshire
- Delaware
- Mississippi
- Oregon
- West Virginia
- Georgia
- Montana
- Pennsylvania
- South Dakota
- Rhode Island
Now, before you become overly concerned about living in one of these states, understand that the enforcement of filial responsibility laws is extremely rare. If you have significant medical debt, consult with an attorney in your state to see exactly what responsibility your adult children may be required to pay back.
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Student loan debt may or may not be passed on to survivors when the borrower dies. What happens to the loan depends on what type of loan was taken out and when it was established.
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If you have federal student loans, they will be forgiven upon death. Federal student loans do not pass on to others as long as a death certificate is presented to the lender. Federal student loans that fall into this category are:
- Direct Subsidized Loans
- Direct Consolidation Loans
- Direct Unsubsidized Loans
- Federal Perkins Loans
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On Nov. 20, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was amended. The added section releases cosigners of a private student loan from financial responsibility if the primary borrower dies. Due to this, all new private student loans with cosigners are not required to repay the loan upon the student’s death.
However, student loans with cosigners taken out before Nov. 20, 2018, may still require the cosigner to be held responsible for the debt.
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Federal Direct PLUS Loans are also forgiven upon the student’s death. In the past, the parent who signed for the PLUS loan was required to bear the burden of the tax responsibility and file the forgiveness as “income” after a child’s death.
Currently, The Tax Cuts and Jobs Act of 2017, is in effect and releases parents from this tax responsibility. This tax stipulation remains in effect until the year 2025.
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There is several different scenarios involving vehicle loan debt upon the borrower’s death. If the auto loan has a cosigner or the vehicle was purchased in a community property state after a couple was married, the cosigner or spouse is responsible to repay the auto loan.
If the loan was obtained before marriage and is only in the deceased spouse’s name, generally the surviving spouse is not held responsible for the debt. The bank will take possession of the vehicle to settle the outstanding debt or the surviving spouse can pay off the vehicle loan.
If the borrower is not married, the survivors can either pay off the vehicle loan and keep the vehicle, sell the vehicle and pay off the loan or return the vehicle to the bank. Heirs do not inherit vehicle loan debt.
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Payday loan debt is very similar to credit card debt when you die. If there was not a cosigner or someone else listed as jointly responsible for the loan, then the company writes off the debt as a loss. Payday loan debt is not transferred to heirs but may be the responsibility of a surviving spouse if the debt was incurred after marriage in a community property state.
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In probate, the home must be paid off with the funds from the estate or the mortgage company must agree to let someone else inherit the loan. If you still owe money on your home, your spouse or heirs usually have three separate options:
Option 1: Sell the home to pay off the outstanding mortgage. The executor of the will can initiate a home sale to fulfill the outstanding debt obligations. If the home is not worth what is owed, additional money from the estate will be used to pay off the mortgage. If additional money is still required, the bank can take possession of the property.
Option 2: If there is enough money in your estate, your heirs can use that money to pay off the mortgage. Or the beneficiaries can use their own money to pay off the loan in full.
Option 3: If there is not enough money in the estate to pay off the loan, an heir may elect to contact the lender in an attempt to take over the loan. The loan would need to be transferred into the new borrower’s name which would require the heir to meet the credit obligations for a loan.
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Lenders can force the sale of a property to fulfill the outstanding equity loan balance if the estate does not have enough capital to pay it off. This is another scenario where the heir may be able to apply with the lender to take over the payments.
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If you have federal tax debt when you die, the IRS gets the first chance at your estate. Legally, the executor of the state is unable to pay any other debt or obligation until the federal tax debt is settled.
If a substantial amount is owed, the IRS will quickly put a lien on any property owned by the deceased in an attempt to satisfy the debt. The federal government will get their money one way or another – but the heirs will not personally be liable for the outstanding tax debt.
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There is not an automatic notification process when a person dies. The next of kin or executor of the state is required to contact the bank and provide a copy of the descendant’s death certificate.
When the death certificate is presented, the financial institution will freeze all of the associated accounts until the probate process is completed. If money is not owed to other lenders, the beneficiaries will be given access to any monies left in the deceased person’s accounts.
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Even though most debts will not be passed on to your heirs when you die, you may not want them to deal with the hassle of paying off all your debt with your estate – only to be left with nothing.
If you have struggled with debt your entire life, a cheap term life insurance policy may be an option to leave a small inheritance to your heirs. Most life insurance policies are dispersed tax-free and are not accessible to creditors.
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Leaving debt behind is a fear many seniors face. On the bright side, your heirs will usually not be personally responsible for paying off your outstanding debts. However, the sooner you can clean up your own financial mess, the better.
Do your best to start paying off your debt so your executor is not faced with a long probate process. If you need help getting started, check out this related post The Debt Payoff Playbook.
This article originally appeared on Arrest Your Debt and was syndicated by MediaFeed.org.
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