Mitch's Mailbox

May 22nd, 2024

Inflation’s Impact On Retirement Assets

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Karen B. from Logan, UT asks: Hi Mitch, with higher prices in just about every spending category for us, my husband and I had to withdraw more from our 401(k) than we anticipated last year. The same will likely apply this year too. Our 401(k) has gone up over the past couple of years, but I worry about the higher withdrawal amount considering prices aren’t going any lower. Any thoughts or advice? Thank you.

Mitch’s Response:

Thanks for sending your question. Many retirees today are confronting this very issue. According to a recent study released by Boston College’s Center for Retirement Research, about 25% of retirees and near-retirees increased their portfolio withdrawal rates between 2021 and 2023, which corresponds with the inflation shock of 2022. According to the research, distributions went up by an average of $1,810 in each of those years.1

But here’s the real gut-wrenching takeaway from the study: Boston College estimates that inflation caused a 14.2% decline in financial wealth held by middle-income retirees over the past few years.

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The decline in financial wealth tends to be higher for those with lower retirement account balances, as higher withdrawal rates impact those accounts more. However, the research also notes that lower retirement account balances tend to hold more cash and bonds than larger retirement accounts, which tend to have higher allocations to stocks. Indeed, the study found that retirees in the top third of wealth distribution could see financial wealth reduced by an average of -4.3% by 2025, while those in the lower third could experience an -18.8% reduction over the same period.

Again, inflation is to blame here. Higher prices of everything from groceries to gas, to homeowner’s insurance can reduce the value of cash and fixed income in a retirement portfolio. Higher interest rates help retirees, but in many cases, equity-like returns are really what’s needed to absorb the higher cost of living while also preserving—or even growing—the value of your liquid assets. Put another way, I think most retirees need to own stocks as part of their diversified asset allocation. Over the past few years, stocks have proven a strong inflation hedge.

I cannot speak to your specific asset allocation, Karen, as I do not know anything about your financial situation or your goals. But my advice would be to ensure that you’re managing your retirement assets for long-term growth in addition to providing you retirement income. Those two goals go hand-in-hand, in my view.

I also have a message for near-retirees. According to the Boston College study, 39% of survey respondents said they saved less from 2021 to 2023, and nearly 25% said they spent some savings. Near-retirees should be doing the opposite—saving more to account for the higher level of prices, and thinking about orienting your long-term goals towards growth in addition to income.

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Disclosure

1 MSN. 2024. https://www.msn.com/en-us/money/personalfinance/inflation-puts-more-retirees-at-risk-of-running-out-of-money/ar-BB1mqPmU

2 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.

3 Zacks Investment Management reserves the right to amend the terms or rescind the free 4 Strategies for Spending Money in Retirement offer at any time and for any reason at its discretion.


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