In 2022, U.S. inflation hit a 40-year high, with prices for food, housing, gasoline, and other key staples increasing by nearly 10% over the previous year.1 During these uncertain times, stocks have continued a roller-coaster ride that has given heartburn to financial professionals and investors alike.
For retirees and seniors on a fixed income, the true costs of inflation and market volatility can be much higher—potentially jeopardizing a comfortable retirement. Though Social Security's annual inflation adjustment is likely to be higher this year than last, this increase may not come soon enough for seniors who are being squeezed now.
With these concerns in mind, there are several ways seniors can navigate the effects of inflation and market volatility.
Don't Claim Social Security Too Early
If you have not already begun to collect Social Security benefits, it is worth carefully considering whether it is better to claim them at age 62, at full retirement age (FRA), or at age 70. Although the right answer can vary from person to person, you may want to consider that each year you put off claiming Social Security will increase your overall benefit amount. This is one way for seniors to essentially "inflation-proof" their retirement income, as one's future Social Security benefit amount will also take into account the effects of inflation.
Use I Bonds and TIPS as an Inflation Hedge
Treasury inflation-protected securities (TIPS) and I bonds are both investments that are designed to keep up with the effects of inflation without putting the invested principal at risk. Both I bonds and TIPS are issued and backed by the federal government, with interest rates and rates of return periodically adjusted to match the inflation rate. These investments are not without some complexities — for example, cashing in an I bond too early can forfeit a certain amount of interest — but are a good way to keep funds safe without allowing their value to erode over time.
Cut Unnecessary Expenses
There often is not much to be done when it comes to the major budget-busters like housing and insurance. But by cutting the expenses you do not need — from streamlining streaming services to switching to generic brands for food purchases — you may be able to free up some money in your budget to put toward other price increases. If it has been a while since you did a top-to-bottom budget review, now may be a good time.
Rebalance Your Portfolio
During periods of market volatility, it is important to ensure your portfolio still accurately reflects your desired asset allocation and risk tolerance. Over time, as the values of different investment classes increase at different rates, your portfolio can become overweight in certain classes. By selling assets in your overweight classes and purchasing assets in your underweight ones, you may be able to regain your desired asset allocation. Having a mixture of cash, stock, bonds (including I bonds), real estate, and other assets can allow you to remain flexible during volatile times.