rising prices
3 Investment Ideas for Retirees Right Now
Ah, retirement. Picture long, blissful walks on the beach. Or youâre watching the sunset from the balcony of your cruise ship and thinking: This is it â the way life should be. Then you casually check your smartphone to see how your investment accounts are doing and, gasp! You might not be as rich as you thought were.
- SEE MORE The Best and Worst Presidents (According to the Stock Market)
Retirees are facing major headwinds right now when it comes to investing: Troubles in Ukraine, higher inflation and stock market jitters to name a few. If you are in or near retirement and wondering what you can do with your portfolio, here are three ideas I share with some of my clients:
1. Consumer defensive stocks
I want clients to be as diversified as possible. However, I may tilt their portfolio to consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies like natural gas and electricity providers, healthcare providers and companies whose products we use day-to-day, like toothpaste companies or food and grocery stores.
According to the Center for Corporate Finance, a leading finance educator to financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility can mean less upside potential, but it can also mean less downside risk, which I find is what many retirees want â less downside (and hopefully better sleep at night).
2. Bonds for retirees â but not just any bonds
I like municipal bonds for retirees. Municipal bonds are issued by states, cities or local municipalities. There are many types of municipal bonds. General Obligation municipal bonds are backed by the taxing authority of the issuer â meaning the state or municipality uses taxes to pay the interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. A toll road uses tolls as the revenue to pay bondholders.
Interest from municipal bonds is usually exempt from federal taxes (though there may be alternative minimum tax (AMT) considerations for certain types of investors). If you live in the state where the bond is issued, the interest may be exempt from state taxes as well.
I like tax-free interest for retirees for several reasons. Retirees may have other sources of taxable income, such as pensions, annuities or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money out of 401(k)s and traditional IRAs in retirement for required minimum distributions, which are taxable as ordinary income. Having some tax-free interest may prevent the retireeâs income from creeping up into the next higher tax bracket in retirement.
Findings from the 2019 Municipal Finance Conference suggest there is less risk of default with general obligation bonds than revenue bonds. This is because revenue bonds typically depend on the vitality of a project, which is more uncertain than the state or municipalityâs ability to raise taxes to pay for a general obligation bond. For this reason, I may tilt a portfolio more toward general obligation municipal bonds than revenue bonds for retirees.
- SEE MORE When It Comes to Your 401(k), Trust But Verify
Municipal bonds are not without risk. There is no guarantee of principal and market value will fluctuate so that an investment, if sold before maturity, may be worth more or less than its original cost. Like any bond, municipal bond prices may be negatively impacted by rising interest rates. Also, municipal bonds may be more sensitive to downturns in the economy â investors may fear a struggling stateâs economy may be unable to repay the bond.
For these reasons, I like to be as diversified as possible. I may use short-term muni bonds for more principal stability and less interest rate risk. I might also blend in intermediate-term municipal bonds for additional yield. If the portfolio is larger than $250K I prefer to buy individual municipal bonds for greater customization and tax-loss harvesting opportunities.
3. Beyond stocks and bonds
I like to sprinkle in small amounts of other investments. I call these my âsatellites.â Depending on the clientâs financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the diversification and the relatively low cost. I usually only buy small amounts, maybe 2%-5% of a portfolio, to help diversify the portfolio and provide an inflation hedge.
Inflation is a significant real enemy for retirees. Rising prices erode the purchasing power of a portfolio. One nice thing about owning real estate is the owner often can raise rents, which is a hedge against rising prices. I may buy Real Estate Investment Trusts (REITs) which pool together various properties. I may also use Private REITs, which are not traded on the public market, so they are less liquid, for more sophisticated investors. Private REITs are not suitable for everyone, as they tend to carry higher fees, donât have published daily prices, but they often provide higher yield than publicly traded REITs.
For more on fighting inflation see my blog post Could Inflation Affect Your Retirement Plans?
Parting thoughts
Investing in retirement is different than investing while working. In retirement, an investorâs time horizon shrinks â they need the money sooner to live off and thereâs no paycheck coming in to replenish the account. There is also less time for a retireeâs portfolio to recover from a stock market correction. Because of this, I find retirees fear losses more than they enjoy their gains.
Understanding these differences is important for successful investing in retirement. Using these three approaches â shifting slightly more to consumer defensive stocks, using municipal bonds to help prevent further taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities â in my opinion can all help smooth out the ride for retirees.
The author provides investment and financial planning advice. For more information, or to discuss your investment needs, please click here to schedule a complimentary call.
Disclaimer: Summit Financial is not responsible for hyperlinks and any external referenced information found in this article. Diversification does not ensure a profit or protect against a loss. Investors cannot directly purchase an index. Individual investor portfolios must be constructed based on the individualâs financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Â
- SEE MORE 4 Steps to Build a Resilient Financial Life
Stock Market Today: Stocks Suffer Worst Losses of 2022
The major indexes wiped out yesterday’s relief-rally gains and then some Thursday in a market-wide rout as Wall Street took a more sober look at the investing landscape.
For one, most of the worries hanging over stocks haven’t disappeared, including on the interest-rate front. While Federal Reserve Chair Jerome Powell did dismiss the idea of a 75-basis-point hike yesterday, the expectation is for at least two more 50-basis-point hikes at the next two Federal Open Market Committee meetings â a still-considerable level of monetary tightening.
- SEE MORE The 25 Cheapest U.S. Cities to Live In
“We are still not out of the woods yet, as there is still too much uncertainty over how the Federal Reserve’s actions will tame inflation without causing a recession,” says Zach Stein, chief investment officer of climate change-focused investment manager Carbon Collective.
Indeed, the yield on the 10-year Treasury, which retreated yesterday, roared back to life Thursday to eclipse 3% once more. That weighed particularly hard on rate-sensitive growth places in tech and tech-esque stocks such as mega-caps Tesla (TSLA, -8.3%), Nvidia (NVDA, -7.3%) and Apple (AAPL, -5.6%).
Speculative assets such as cryptocurrency went heavily risk-off, too; Bitcoin, for instance, plunged 8.9% to $36,287. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
Gene Goldman, chief investment officer of Cetera Investment Management, pointed to additional drivers for Thursday’s woes.
Sign up for Kiplinger’s FREE Investing Weekly e-letter for stock, ETF and mutual fund recommendations, and other investing advice.
“There is less optimism around the less hawkish Fed and the softish landing scenario,” he says. “We saw data this morning portraying more inflation and a weaker economy â labor costs surged in Q1, unemployment claims rose, and productivity was weaker than expected.”
Goldman also pointed to disappointing earnings reports from the e-commerce industry, which, because of high valuations to boot, were selling off particularly hard.
- SEE MORE The 15 Best Value Stocks to Buy Right Now
Shopify (SHOP), for one, plunged 14.9% after the e-commerce company reported lower-than-expected adjusted earnings and revenue in its first quarter (20 cents vs. 63 cents est.; $1.2 billion vs. $1.24 billion est.) and projected soft revenue guidance in the first half amid tough comparisons. SHOP also said it will buy San Francisco-based fulfillment startup Deliverr for $2.1 billion.
“Although e-commerce growth was below our view, SHOP is lapping pandemic figures, with comparisons to get more favorable exiting the calendar year,” says CFRA Research analyst Angelo Zino (Hold). “That said, we do think consensus expectations will need to be tempered, partly reflecting lower than expected merchant additions to start the year.”
eBay (EBAY, -11.7%) spiraled lower despite topping first-quarter estimates after it forecast second-quarter revenues of $2.35 billion to $2.40 billion and adjusted earnings of 87 to 91 cents per share, both under expectations for $2.54 billion and $1.01 per share, respectively. Etsy (ETSY, -16.8%), meanwhile, slightly beat revenue expectations but was merely in-line on profits and forecast Q2 sales of $540 million to $590 million, falling far short of the $627 million analyst mark. Amazon.com (AMZN) bled 7.6% in sympathy.
The result was the worst single-session performance of 2022 for both the Nasdaq Composite (-5.0% to 12,317) and Dow Jones Industrial Average (-3.1% to 32,997), while the S&P 500 (-3.6% to 4,146) was just a hair shy of outdoing its marginally larger decline April 29.
YCharts
How low could we go from here?
Well, a bear market (a 20% drop from highs) would mean about 3,850 for the S&P 500, and John Lynch, chief investment officer for Comerica Wealth Management, thinks the index could scrape that figure.
- SEE MORE Stock Market Trading Hours: What Time Is the Stock Market Open Today?
“Bear markets without recession tend to be short and shallow,” Lynch says. “It’s conceivable the S&P 500 needs to establish a bottom in this 3,850 to 4,000 range. Without recession in 2022, which is our base case, stocks can resume higher as equity investors discount cyclical recovery in an environment where monetary policy is no longer shepherding expensive growth and technology names at a multiple of sales.”
Other news in the stock market today:
- The small-cap Russell 2000Â dropped 4.0% to 1,871.
- U.S. crude oil futures eduged up 0.4% to settle at $1081.26 per barrel.
- Gold futures gained 0.3% to finish at $1,875.70 an ounce.
- Booking Holdings (BKNG) was a rare splash of green today, adding 3.3% after the online travel company reported earnings. In its first quarter, BKNG reported earnings of $3.90 per share on $2.7 billion in revenue, more than the 85 cents per share and $2.5 billion analysts were expecting. The company also posted gross bookings of $27.3 billion, a record quarterly amount. “We have a favorable view of online travel companies, and particularly of BKNG given its focus on Europe, where it generates most of its gross profit,” says Argus Research analyst John Staszak (Buy). “BKNG is trading at a projected 2022 price-to-earnings ratio of 20.2, below the average for other online booking companies; however, we believe that it merits a higher multiple given the company’s strong earnings outlook.”
Warren Buffett Splashes More Cash
Warren Buffett is spending like there’s no tomorrow. A Wednesday evening regulatory filing from Berkshire Hathaway (BRK.B, -2.5%) revealed that the Oracle of Omaha’s holding company bought $350 million shares in energy firm Occidental Petroleum (OXY, +1.2%).Â
- SEE MORE Now You Can Own Bitcoin in 401(k)s. Should You?
The Berkshire Hathaway equity portfolio has plumped up on Occidental exposure in recent months â Buffett revealed a nearly 10% OXY stake in early March that now sits at 15.2%, and he also owns $10 billion worth of 8% preferred stock, as well as 84 million warrants to purchase OXY stock. The move is part of Buffett’s renewed buying interest in energy that has seen Chevron (CVX) become Berkshire’s fourth-largest holding.
All of this falls under an even larger underlying theme, which is that Buffett has gone from being a voracious seller in 2021 to buying everything that isn’t tied down this year. Part of that seems to be the Oracle taking advantage of a considerable dip in the market. But a closer look at what Buffett’s buying signals that he, like the rest of us, has rapidly rising prices on the brain.
We recently talked to noted Buffett expert David Kass about the Berkshire CEO’s recent binge, and how much of Warren Buffett’s activity has been connected to inflation.
- SEE MORE Sell in May and Go Away? Here We Go Again …
Warren Buffett’s Inflation Plan: Buy, Buy, Buy
Rapidly rising prices are on the radar for virtually everyone in America â even the billionaire class. Indeed, Warren Buffett himself has his eyes on inflation.
Buffett finally whipped out Berkshire Hathaway’s (BRK.B, $318.99) checkbook in a big way earlier this year, spending tens of billions of dollars in a matter of weeks.Â
- SEE MORE 65 Best Dividend Stocks You Can Count On in 2022
All it took was a historically bad start to the year for stocks â or at least, that’s how things would appear at first glance.
But stumbling share prices, while certainly critical, aren’t the whole story here. Warren Buffett clearly has been monitoring America’s rampant inflation, which appears to be a key factor driving his renewed appetite for equities.Â
And make no mistake: Berkshire’s chairman and CEO is hungry.
Berkshire Buys Like There’s No Tomorrow
Buffett has embarked on a shopping spree the likes of which we haven’t seen since the Great Financial Crisis. During the first quarter â¦
- The Berkshire Hathaway equity portfolio scooped up $41.5 billion in net stock purchases in the first quarter. That’s the most cash Buffett has splurged on equities in a quarter since 2008
- The Oracle of Omaha spent another $3.2 billion buying back BRK.B shares.
- Berkshire also announced that it would spend $11.6 billion to acquire insurer Alleghany outright â a deal that should close during the fourth quarter.
True, the market’s terrible start to 2022 no doubt played a starring role in Buffett’s largesse. The S&P 500 tumbled as much as 13% from its all-time high at one point in Q1. Buffett, as patient as any investor when it comes to waiting for bargains, at long last pounced â and did so with surgical precision.
- SEE MORE Sell in May and Go Away? Here We Go Again …
Buffett put nearly 30% of Berkshire’s massive cash pile to work in equities last quarter. And according to Bespoke Investment Group, almost 80% of his purchases came during the weakest part of the quarter.
That’s remarkable timing.
Contrast that with 2021, when the S&P 500 generated a total return (price appreciation plus dividends) of nearly 29%, or its third best run since 1997. Berkshire, however, used the market’s outstanding performance as a chance to lighten up on stocks. Indeed, the holding company was a net seller of equities in all four quarters of 2021.Â
Suffice to say that Warren Buffett is pretty adept at the whole “buy low, sell high” thing. When investors are fearful, he more often than not gets greedy.Â
Warren Buffett Makes the Most of Inflation
But there’s a second (and perhaps more urgent) factor driving Buffett’s lavish spending on stocks right now: Inflation.Â
Sign up for Kiplinger’s FREE Closing Bell e-letter: Our daily look at the stock market’s most important headlines, and what moves investors should make.
Remember, Warren Buffett rather famously didn’t go shopping when the market lost a third of its value in the pandemic crash of 2020. So while he hasn’t been this active buying stocks in ages â it’s not just because stocks are in a slump.
It’s because of inflation.
When prices are rising at the fastest pace in four decades, cash is trash. That helps explain Buffett’s biggest Q1 binge, says David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business and noted Buffett expert.
Berkshire raised its stake in Chevron (CVX, $162.49) to $26 billion, up from a modest $4.5 billion at the beginning of the year. That’s a big deal. The integrated energy major and Dow Jones Industrial Average stock is now Berkshire’s fourth-largest holding.
- SEE MORE The 15 Best Value Stocks to Buy Right Now
And it’s not like Buffett scooped up those CVX shares when they were on sale. The stock traded at all-time highs in Q1.
In addition to a number of other attractive attributes, Warren Buffett also sees an inflation hedge in Chevron, Kass says. And even if oil prices level off or reverse trend, a stake in CVX is better than sitting in cash and equivalents.
“Chevron has a large stock buyback program and pays a cash dividend of 3.5%,” Kass says. “That makes it a relatively safe cash alternative. Instead of earning essentially zero on Treasury bills, why not earn a dividend yield and a buyback yield that combined probably come in somewhere in the high single digits?”
The same calculus of falling stock prices plus rising inflation can be seen in a number of Buffett’s recent buys.Â
Earlier this year, Berkshire disclosed a series of purchases in Occidental Petroleum (OXY, $59.24). Buffett’s conglomerate is now the integrated oil and gas firm’s largest investor, with 14.6% of its shares outstanding.Â
“Chevron and Occidental, to me, they make a whole lot of sense,” Kass says. “Oil, I believe, is a good hedge against inflation.”
This stocks-down-inflation-up dynamic helps explain the sudden and stark reversal in Berkshire’s balance sheet.Â
When inflation is all but dormant, as it was for more than a decade until last year, Warren Buffett was content to accumulate cash. From 2016 to 2021 â a period in which Buffett bemoaned the fact that relentlessly rising asset prices made it nigh impossible to find whale-sized acquisitions â Berkshire’s cash hoard essentially doubled, from $75 billion to about $147 billion.
Watching the cash pile up, however, was preferable to destroying capital by overpaying for assets in an aging bull market.
- SEE MORE The 22 Best Stocks to Buy for 2022
But now, with share prices falling and consumer prices rising, putting cash to work in more attractively priced companies that pay dividends and buy back their own stock is almost irresistible.Â
For example, Buffett bought $600 million additional shares in Apple (AAPL, $159.48) following a three-session decline in the stock in Q1. The iPhone maker recently authorized a $90 billion share repurchase program and disburses more than $14 billion in dividends annually.Â
Or take the case of HP (HPQ, $37.9). Hefty buybacks and dividends â not to mention a cheap valuation â no doubt factored into Buffett’s purchase of a major stake in the computer and printer maker in April, Kass notes.
Topping off Buffett’s buying was an $11.6 billion outlay to outright acquire insurer Alleghany. This Warren Buffett move wasn’t tied to inflation â it just seemed a fruitful way to put more of that cash to work. Kunal Sawhney, CEO of independent equity research firm Kalkine, says Alleghany makes a perfect strategic fit with Berkshire’s extant insurance businesses.Â
Even after Buffett’s Q1 buying extravaganza, Berkshire retains $106 billion in its arsenal of financial firepower. If stocks keep struggling amid intense inflationary pressures, expect Buffett to make even more bold bets and splashy buys.Â
- SEE MORE The 25 Cheapest U.S. Cities to Live In
The 15 Best Value Stocks to Buy Right Now
In 2022, the old rules of investing have mostly gone out the window, but one thing hasn’t changed: Wall Street’s best value stocks continue to be an attractive place for investors to plunk down their money for the long term.
The S&P 500 is down roughly 10% year-to-date. War continues to rage in Ukraine and disrupt energy markets. And significant changes in interest-rate policy continue to upend investment strategies that have been profitable for several years running.
- SEE MORE The 22 Best Stocks to Buy for 2022
But that’s the thing about investing. If you want to get ahead, it’s important to think beyond the obvious opportunities and consider a holistic approach that will generate returns even in even challenging environments. That involves looking beyond fashionable growth investments to value stocks that might been roughed up of late but still offer long-term upside.
In hopes of finding the best value stocks for investors right now, we looked for:
- Companies with a minimum market value of about $1 billion
- Those with forward price-to-earnings (P/E) ratios below the broader market (for reference, the S&P 500’s forward P/E is currently at 18.8)
- Those with price/earnings-to-growth (PEG) ratios below 1 (PEG factors in future growth estimates, and anything under 1 is considered undervalued)
- Strong analyst support, with at least 10 Wall Street experts covering the stock and the vast majority of those issuing ratings of Buy or Strong Buy
A few of these companies have admittedly seen trouble lately, hence their sagging stock prices, but even then, their underlying businesses are sound. And considering the broader challenges to every company on Wall Street, it’s important for investors to focus on high-quality picks over the latest flashy growth narrative, regardless of recent performance.
Here are 15 of the best value stocks to buy now.
- SEE MORE 12 Best Monthly Dividend Stocks and Funds to Buy for 2022
Share prices and other market data as of April 25. Analyst ratings courtesy of S&P Global Market Intelligence. Stocks are listed by analysts’ consensus recommendation, from highest score (worst) to lowest (best).
Have Mortgage Rates Peaked?
Two weeks ago, I wrote about how mortgage rates jumped, something just about everyone is aware of. But I also attempted to quantify the actual impact in terms of monthly mortgage payment. For the typical home, the principal and interest payment went up about 20%, or $230 per month. Not great news, but not necessarily… Read More »Have Mortgage Rates Peaked?
The post Have Mortgage Rates Peaked? appeared first on The Truth About Mortgage.
Stock Market Today: Ukraine Talks Bring Out the Bulls
Fresh signs of at least the potential of a resolution in Eastern Europe whetted risk appetites Tuesday, even as the ominous 2-10 yield curve came even closer to inverting.Â
During the latest round of talks with Ukraine today, Russian Deputy Defense Minister Alexander Fomin said his country’s military would “drastically” remove its military presence from Kyiv. That triggered another day of buying from investors, who weren’t deterred by a U.S. official’s skeptical comment to news outlets that Russia’s moves indicated “a redeployment, not a withdrawal.”
- SEE MORE The 22 Best Stocks to Buy for 2022
Wall Street also wasn’t put off by a potential inversion of the two- and 10-year Treasury rates â “potential” being the key word, as various data sources conflicted on whether the two-year’s yield merely equaled the 10-year yield or surpassed it.
Even then, Lauren Goodwin, economist and portfolio strategist at New York Life Investments, warns against using a yield inversion as an egg timer.
“While curve inversion has historically been an important market signal of recession risk, it does not tell us much about when recession might likely occur,” she says.
Sign up for Kiplinger’s FREE Investing Weekly e-letter for stock, ETF and mutual fund recommendations, and other investing advice.
Real estate investment trusts (REITs) including mall operator Simon Property Group (SPG, +4.8%) and Public Storage (PSA, +3.4%) enjoyed the biggest gains Tuesday, with the sector up 2.9% to lead the S&P 500 (+1.2% to 4,631). The Nasdaq Composite had an even better day, up 1.8% to 14,619, while the Dow Jones Industrial Average recorded a 1.0% gain to 35,294.
YCharts
Other news in the stock market today:
- The small-cap Russell 2000 roared ahead by 2.7% to 2,133.
- U.S. crude oil futures retreated 1.6% to end at $104.24 per barrel.
- Gold futures fell 1.4% to settle at $1,912.20 an ounce.
- Bitcoin slid 0.5% to $47,720.70. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
- Shares of Robinhood (HOOD) spiked 24.2% after the financial services platform said it extended trading hours for clients. Customers on HOOD’s platform will now be able to trade between 7 a.m. through 8 p.m. ET, giving them an additional four hours. This big upside move put a dent in HOOD’s year-to-date deficit. Heading into today, shares were down nearly 28% for the year-to-date.
- FedEx (FDX) gained 3.7% on news Fred Smith will step down as CEO, effective June 1. Smith has been overseeing the delivery giant since he founded the company in 1973. He will be succeeded by Raj Subramaniam, current president and chief operating officer of FedEx. “We anticipate a seamless transition as FedEx appears to have been grooming Mr. Subramaniam to be the company’s next CEO,” says Oppenheimer analyst Scott Schneeberger (Perform). “In recent years Mr. Smith appeared to have been ceding an increasing amount of operational and investor-facing responsibility to his top reports, particularly Mr. Subramaniam.”
Push Back on Inflation
We’ll find out March’s jobs tally later this week, but another data point on Wall Street’s watch list is the core Personal Consumer Expenditures (PCE) price index.
- SEE MORE 5 Superb Stocks to Shield Against Stagflation
That report, due out Wednesday, represents the Federal Reserve’s favored gauge of inflation â another critical factor in the market’s direction from here.Â
“We believe it is important to point out the historical impact that inflation can have on equity market valuation,” says John Lynch, chief investment officer for Comerica Wealth Management. “Specifically, high levels of inflation ⦠have historically pressured the price-to-earnings (P/E) ratio for the S&P 500 Index. Historically, when the CPI approaches 8.0%, the average [trailing 12-month] P/E for the S&P 500 is ~12, which could bring the index to unspeakable levels.”
Given that the S&P 500 currently trades at more than 26 times trailing earnings, that would be very bad news, indeed.Â
You can swat back at inflation via just about any investment type you like. Those looking to make concentrated bets against rising prices can consider these five stocks poised to push higher in an inflationary environment, while those who prefer a diversified approach might instead prefer these five mutual funds.
But some of the most interesting tools in the tool box are inflation-fighting exchange-traded funds (ETFs). Several of these ETFs simply happen to be positioned in areas of the market that do well as prices expand, but in some cases, an inflation-resistant portfolio is the explicit goal.
- SEE MORE Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio
Ways to Help Protect Your Retirement Against Inflation with a Plan Built to Last
If you’re getting tired of paying more for food, gas, clothes and rent â and just about everything else these days â you arenât alone. Inflation has been upending household budgets for months now, and its momentum doesnât seem to be slowing.
- SEE MORE The Inflation Hedge Youâve Never Heard Of
Retirees on fixed incomes will most likely feel the pinch on their pocketbooks for at least the next few months. If you havenât already, now is the time to review your budget, your income plan and your portfolio with an eye toward protecting your purchasing power.
As we move through the first months of 2022, here are some specific planning points to keep in mind:
Do You Have a Backup Plan for Your Income Plan?
This yearâs historic 5.9% Social Security cost-of-living adjustment (COLA) will help retirees with rising prices â but probably not as much as many hoped. Thatâs because Medicare’s Part B monthly premiums also saw a bigger hike this year. Standard monthly premiums for Part B now cost $170.10 â up 14.5% from $148.50 in 2021.
Most Social Security recipients whose Part B premiums are typically deducted from their Social Security benefits still will see a net increase in their monthly checks. But it likely wonât be enough to completely offset increasing costs if inflation sticks around for a while. And some private pensions donât offer automatic COLAs. You may find itâs necessary to modify your budget or to look to another income source (such as a temporary job, home equity loan, etc.) to make up the difference.
Is Your Investment Plan Designed to Keep Up with Rising Costs?
Letâs face it, inflation isnât a new or unexpected risk for retirees. Even relatively low rates of inflation can have a harmful effect on your purchasing power over time.
Itâs vital, therefore, to develop an investment plan that can help you keep pace, whether costs are soaring, as they have been recently, or quietly creeping up over time.
Inflation-hedging strategies should be a well-thought-out, long-term component of your retirement portfolio, and your financial adviser can help you pick the best products based on your needs.
- SEE MORE Even the Experts Canât Figure Out How to Plan for Retirement Income
It might mean looking at the pros and cons of investing in commodities or real estate, both of which tend to rise in value during periods of inflation. Or it could mean purchasing U.S. Treasury Inflation-Protected Securities (or TIPS), which offer the safety of government-backed bonds but with interest payments that are designed to rise with inflation.
Your adviser will likely recommend leaving a portion of your portfolio invested in stocks to keep your money growing for a long retirement. Stocks are unpredictable, of course, but historically the market has provided patient investors with returns that beat inflation.
Are You Reacting to Media Hype, or Your Reality?
One of the most important things to keep in mind moving forward is that this is not a time to panic.
Economists arenât expecting the double-digit inflation rates the country experienced in the 1970s and 1980s.
Itâs also important to note that some of the categories hit hardest by current inflationary pressures arenât a factor for many seniors. If, for example, you own your home (as most Americans over 65 do), you donât have to contend with todayâs rising rental costs. And if youâre in the later years of your retirement, itâs likely your day-to-day living expenses already have or could be reduced. (Youâre probably driving less, traveling less, can manage with a smaller wardrobe, and may find it easier to cut your grocery bills than a younger family might.)
Donât let hyped-up headlines push you into making knee-jerk moves that arenât necessary or could even hurt your long-range plans.
Yes, if you sit back and do nothing, inflation can eat away at your savings and impact your retirement lifestyle. But by reducing your spending when possible, finding a sensible solution for filling any potential income gap, and building inflation-hedging strategies into your investment plan, you should be able to soften the blow.
Kim Franke-Folstad contributed to this article.
Investing involves risk, including the potential loss of principal. Ensign Wealth Management is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Ensign Wealth Management are not affiliated companies.
Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Our firm is not affiliated with or endorsed by the U.S. government or any governmental agency. 1208776 â 02/22
- SEE MORE Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
Was the Pandemic Really a Good Thing for Some (Financially Speaking)?
Itâs hard to think that there is a bright spot when you look at the death and destruction that the pandemic brought to so many. But if we step back, letâs see if there has been a silver lining for some.
We canât forget the backdrop of the pandemic. We were petrified as we went into 2020, as people got sick and businesses started to shutter. We had no defenses from the disease or from losing our loved ones and livelihoods. Unemployment surged to levels not since the Depression. But help was on the way. The government poured trillions of dollars into the economy; people received real money via two rounds of stimulus payments; the government also paused mortgage and student debt payments for millions of people; the Fed kept liquidity flowing into our economy; inflation and interest rates were negligible.Â
What Were the Results?
According to the Census Bureau, stimulus payments lifted 11.7 million people out of poverty. In other words, almost 12 million more people would have been considered impoverished if Congress had not acted to alleviate the situation.
The stimulus checks were delivered to people both above and below the poverty line.  We know that not everyone benefited equally, and many people are still in a tenuous position. But if you were working and Zooming from home in your PJs, you didnât need to buy work clothes or spend money commuting to the office. You werenât traveling or going out to eat. So, for those who were lucky enough to keep their jobs and were not trying to just survive, the stimulus checks were a bonus. Working from home allowed many to reduce their expenses. Their mortgages and student loans were on pause, and they diligently increased their savings. These people amassed $2.7 trillion in extra savings.
Savings Were Up
The personal savings rate, which is a measure of how much money people have left over after their expenses and taxes, soared to almost 33% in April 2020, according to the Bureau of Economic Analysis. For the two years before the pandemic, it had averaged just under 8%.
According to a report from NerdWallet and Goldman Sachs, families in the top 20% of income put more than a third of their extra savings into investment accounts or down payments on homes, and lower-income families mostly kept their extra savings in banks or used it to pay down debt. Whatâs interesting, as noted in the report, is that, âThe majority of Americans (78%) report that the pandemic has spurred them to take some sort of financial action.â
Debt Was Down
Americans also paid down some of their credit card debt during the pandemic. Over $100 billion in credit card debt has been paid off by consumers due to the influx of stimulus money. People also had fewer places to spend money, but still they could have been clicking away online, and didnât. Before you jump for joy, the average cardholder still has more than $5,000 of credit card debt.
Thatâs Changing: People Are Spending Again
I wish I could see the trends of spending less, saving more and paying down credit cards continue ⦠but no. We noted a great holiday shopping boom, even the midst of rising prices due to supply chain issues and inflation. Holiday spending increased by 11% for online sales and over 8% for in-store sales.
Millennials and Gen Zers Are So-Over-Covid
Optimism about improved finances in 2022 is highest among Generation Z, those born from 1997 to 2012, and diminishes with each successive older generation, based on Bankrateâs survey findings.
Gen Zers and millennials who said they felt optimistic about 2022âs finances most often attributed it to making more money at work, while baby boomers who felt positive cited having less debt.
Some of this optimism is based upon the fact that the younger generations are expected to enjoy higher wage increases in 2022. Pundits say that the expected 4% wage increase is due to the current soaring  7.48% inflation rate, as food, housing and gas prices are spiking. I think it also has to do with the fear of losing good employees. Last year the job market lost over 38 million workers during the Great Resignation, to seek fame and fortune elsewhere. The raise many will receive may not be a reflection of a job well done, but more of a plea not to leave.
What Can You Do to Remain Financially Healthy in 2022?
- Create a real budget that you will stick to. List all of your expenses based upon your real spending habits, not the pie-in-the-sky ones you want. Then re-create the budget you want. Make sure that paying off debt is one of your line-items for your new budget.
- Set up an emergency fund. You should make sure that you have three to six months of money put aside. It is not only to buy those tires you may need, but it is also for money to carry you over in case of a lost job.
- Cut down spending. You know that this makes sense, but it is hard to do. As a rule of thumb, if you canât pay the full balance on your credit card each month, donât charge anymore. If you are carrying balances, pay more than the minimum each month. The average rate on credit cards today is 16%, and those rates will rise as general rates rise this year.
- Review your credit card statements each month. Cancel all of the memberships and things you no longer want or use.
- Spend less on food and entertainment. Itâs expensive to go out. Your friends will want to save money, as well. Decide to get together for potluck dinners. Enjoy each other, and enjoy not getting the credit card bill at the end of the month.
The pandemic can be seen as a really tough wake-up call. It stills looms over our nationâs health. Financial health is part of your overall health. Itâs not about how much you earn, itâs about how much you save and spend to create a stress-free life for you and your loved ones.
How Does Inflation Affect Retirement?
For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. Thatâs 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 donât run out […]
The post How Does Inflation Affect Retirement? appeared first on SoFi.