Three painful ways in which inflation is ravaging seniors' retirement income

Inflation is ravaging some of the asset classes that are cornerstones for seniors, ones that provide the backbone of their income in retirement. Here's look at three troubled areas.

In times like these, Mary Johnson is willing to break the rules — at least when it comes to some of the classic axioms of investing.

She’s gone heavy into stocks even though senior citizens like herself are generally advised to keep conservative portfolios that skew heavily toward bonds.

“I don’t even hold bonds. That’s very risky,” she said. “What I am doing now is looking at very reliable dividend (paying) companies” and keeping a close eye on them.

Johnson, who lives in rural Virginia, is not content to sit back with a balanced portfolio and watch the grass grow. She’s an active investor who is proud of how her portfolio has performed.

Johnson said she is in good shape at the moment following her stock-heavy strategy, but there are millions of seniors who wouldn’t be able to say the same. Some of the traditional investments upon which seniors depend have performed poorly amid an inflation rate that hit 7.9% last month, the fastest pace in 40 years.

It’s sending a wave of worry through the ranks of seniors.

“The number one concern anyone has is the risk of outliving their assets,” said Kevin Lao, a certified financial planner for Imagine Financial Security in St. Augustine, Florida.

Inflation is ravaging some of the asset classes that are cornerstones for seniors, ones that provide the backbone of their income in retirement. A look at three troubled ones:

Bonds have fallen behind

Major bond funds, known for relatively mild price swings, have been taking a beating.

Big funds like the iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market ETF, which encompass the entire bond market, are down 5.8% so far this year.

The pain is palpable.

For generations, investors have been urged to maintain a balance between stocks and bonds in a portfolio following a rule of thumb: The older you get, the higher percentage of bonds you should hold.

The idea is that by holding more bonds, seniors can ride out wild stock market swings. Younger investors have many years to recover from losses. Seniors, not so.

The formula says to subtract your age from 100 to yield the percentage of stocks you should hold. A 30-year-old, thus, should have 70% of a portfolio in stocks. An 80-year-old, only 20%. The rest would go to safer investments with milder price swings, like bonds.

Lao said he has looked to shorter-duration bonds for his clients that haven't been hit as hard as those with longer average durations.

Investors can also consider buying Treasury Inflation-Protected Securities, or TIPS, or use strategies like "laddering" their bond purchases to try to minimize the swings.

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Annuities may not keep up

Some seniors have purchased annuities to provide a steady stream of income. They pay a large lump sum up front and receive a guaranteed stream of income, such as a monthly check, in return.

But annuities are controversial. Some have large commissions that can diminish their value. Also, certain ones are better at protecting against inflation than others. Investors need to decide whether they want to receive a lower periodic payout in exchange for inflation protection or cost-of-living adjustments.

Senior talking on phone and looking at check.

For instance, a 65-year-old man living in California who plunked down $100,000 for an annuity could potentially receive a check every month for $490, but it’s reduced to $390 if they opt for a 2% cost-of-living annual increase.

Those receiving annuities who bet that low inflation rates would last forever may regret the decision.

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Inflation may eat into pensions

The traditional pension may be going by the wayside, but many seniors still count on that check every month.

About one out of four workers were in pension plans as of 2019, the Bureau of Labor Statistics reported.

Some 16% of workers in the private sector had pension plans, along with 86% of those who spent their careers in government agencies.

But while government workers commonly have cost-of-living adjustments (COLA) built in, most private-sector workers don’t. And there’s no guarantee that COLA increases will keep pace with inflation.

Ray LeVitre, a certified financial planner for the Net Worth Advisory Group in Sandy, Utah, said the impact of inflation has become a hot topic for all receiving pensions.

“Most of our discussion is around how higher inflation will erode their nest eggs faster,” he said.

As such, he said those planning to retire should consider taking the lump sum rather than a monthly payout “especially when there is no COLA.”

But the advice comes with a caveat: Those who take the money out can’t just forget about it. They have to make sure keep track of their investments.

“Taking the lump sum means you have to manage the money, make sure you are not taking out too much and depleting the portfolio too quickly,” he said.

And that also means having to ride out the ups and downs.

Mary Johnson, who is of retirement age but still working as the social security and Medicare analyst for The Senior Citizens League, a nonpartisan advocacy group, said she’s encountered some large volatility in managing her stock-heavy portfolio.

Especially painful was a 29% percent decrease she encountered as the coronavirus pandemic swept through the stock market in 2020. But Johnson stayed the course.

"That did not bother me,” he said.

Her advice for others? Paying careful attention to the portfolio is the key.

“They have to work at it,” she said.

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