As consumer prices rose to historic levels last year, many wealth management experts warned that they would eat into retirement savings. Two studies now support this dire prediction, and the damage is severe.
For workers who continue to save for retirement, inflation has hit hard out of their nest egg. By 2022, 25% of U.S. workers will cut their retirement savings because the cost of goods and services has risen, according to the report. new research TIAA, an international insurance company based in New York. Nearly half of that number (12%) stopped saving altogether.
Surya Kolluri, director of the TIAA Institute, the research arm of insurance companies, said:
Even for those who are already retired, inflation has put a strain on their finances. The Senior Citizens League, a Virginia-based advocacy group, investigated 1,055 people aged 55 and over. Of that group, his 26% of seniors ran out of retirement accounts in the first quarter of 2023, up from his 20% in the third quarter of 2022. Perhaps even more concerning, 49% spent the last quarter on emergency savings. This is up from his 38% in 2022.
“It’s putting a huge strain on people,” said Mary Johnson, a social security policy analyst at the Federation. .”
Last year, prices were at an all-time high. In June 2022, his 12-month rise in the consumer price index reached his 9.1%, according to. Bureau of Labor Statistics — Highest since the early 1980s. After repeated rate hikes by the Federal Reserve, the CPI has settled at his 5% as of March.
But there are many ways to measure or experience inflation, and for many Americans the storm has yet to feel over. Food prices, for example, were still up 8.5%, according to the same BLS data for March. housing costs are still up 8.2%.
As a result, many Americans struggle to make a living. A TIAA study found that in 2022, 39% of workers will not have enough savings to cover a month’s expenses, except for retirement planning. This is up significantly from 2021, when only 32% said yes.
And even if inflation continues to fall, last year’s cut in retirement savings could have long-term consequences.
“This is money that isn’t saved, so it doesn’t exist and isn’t growing,” says Paul Jakowski, senior economist at the TIAA Institute. “It just got lost.”
Another example of this long-term damage is debt. In January 2022, his 20% of workers told his TIAA that debt “has prevented him from adequately addressing other financial priorities.” In January 2023, that figure rose to 26% for him after his year of inflation.
For Americans already retired, the situation was similar. The Federation of Senior Citizens asked the respondent (97% of whom collect Social Security) if he had been in debt for more than 90 days on a credit card. By 2022 she will say 35% yes. By 2023, 45% have done so. This is the highest percentage the survey has ever recorded.
Adding that interest rates are at historically high levels, Johnson said there was a “significant increase in the number of people reporting holding their balances longer.” “Now is not the time for that!”
Can retirement savers get back on their feet? Kolluri thinks he can, but he needs help from wealth managers.
“When someone navigates through life’s journey, the most important thing they can get is advice and guidance from a financial advisor,” Kolluri said. Inflation plays a detrimental role.”
there is many tips Advisors can offer clients to deal with price increases. One is to invest in assets and accounts that actually benefit from inflation, such as bonds, certificates of deposit, and high-yield savings accounts. For example, American Express currently offers the following savings accounts: 3.75% interestand 6-month US Treasuries currently yield 5% or more.
Despite market volatility, some wealth managers recommend doubling down on stock investments. Not always, but in the very long term, the U.S. stock market tends to outpace inflation and dividends can be used to cover rising costs.
“It doesn’t matter if you are retired or have been retired for 20+ years,” said Nicolas Bunio, a certified financial planner. Retirement Advisor in Downingtown, Pennsylvania. “You shouldn’t avoid stocks completely.”
Most importantly, advisors can help clients think realistically about inflation. With more information and guidance, investors can prepare for price increases in their daily lives and factor them into their retirement plans.
is a certified financial planner, LA Wealth Management in Long Beach, California. “If your retirement plan barely works, you may not be ready to retire.”