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Retirees: How has Inflation and Stock Market Volatility Impacted Your Financial Situation?

You might be worried about the decline in stock markets or the high inflation, especially if you are nearing retirement. There are many reasons to be concerned about today’s uncertain financial environment. Instead of becoming paralyzed by worry or making poor decisions, turn your fear into motivation and learn how to protect your retirement funds.

History has proven that even in uncertain times, you should not cash out your stock market investments or give in to salespeople promising they will take care of your money and keep you safe if they sell you something.

First step

Instead of panicking or worrying, learn how susceptible your retirement funds to volatility in the stock market and inflation. You shouldn’t be focusing on the stock market swings or news headlines that proclaim that inflation is rising. Instead, look at how your monthly and annually finances are affected. This information will help you determine if you need to make changes in your retirement investments or monthly finances.

You can get started by following the simple formula for retirement security.

I > E, or

Your income should exceed your living expenses.

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Let’s take a look at each part of this formula.

Evaluate the vulnerability of your retirement income

Review all your retirement income sources to determine if you have enough cashflow to cover your expenses.

Social Security. Social Security income is at least half of most retirees’ regular monthly income, and sometimes up to three-quarters. Social Security benefits offer protection against both of these risks.

A 5.9% COLA should have been included in your January 2022 Social Security Check. Experts have suggested that the 2023 COLA could reach as high as 8.8%. Your actual living expenses may rise at a faster or slower rate than the COLA. Many retirees found that the 2022 COLA was consumed due to the rise in Medicare premiums. This left little or no money to cover other costs.

Any pensions you may have. Your income will not be affected by the stock market crash if you are fortunate enough to have a monthly pension from an ex-employer. The cost of living is not the main concern for traditional pensions, which are less likely to be affected by inflation.

A significant traditional pension will protect you against stock market crashes if it is a large portion. You can relax about stock market volatility if your lifetime income covers all or most of your basic living expenses. However, this is less true for inflation as Social Security benefits are typically your only protection against it.

Withdrawals of retirement investments. Many retired people invest their money in 401(k), IRAs, and then make regular withdrawals to supplement or increase their Social Security and pension income. Experts recommend a dynamic withdrawal strategy. This allows you to adjust your regular withdrawals in order to reflect changes in investment performance. You will need to evaluate the amount of losses that you have suffered so far in 2022.

Your retirement provider should be capable of telling you the year-to date losses for any mutual funds and ETFs you have in retirement savings. Funds with typical asset allocations for retirees have fallen by 10% to 20% so far in 2022. Consider adjusting your periodic withdrawals to reflect any losses that you have suffered.

Other income. Take into account the effect of inflation on other retirement income, such as your part-time or rental income.

Now that you know how inflation and declines in the stock market affect your retirement income, it is time to look at your expenses.

Evaluate the impact on your daily living expenses

Housing is your biggest expense if you are like most retirees. It covers your mortgage payments, rent, property taxes and homeowners’ insurance. Maintenance costs also come into play. It’s unlikely that your mortgage payment has increased or decreased in recent years. However, you might be paying more for other expenses. It’s important to determine if these expenses are sufficient to cause a disruption to your budget.

You might also want to estimate recent increases of your monthly utility or gasoline costs.

Next are your Medicare and medical insurance premiums. They are usually adjusted once a year. It is difficult to predict how premiums will rise in 2023, given the current environment. According to some publications, Traditional Medicare premiums might not rise next year after the significant increase in 2022. There is also the possibility that Medicare Advantage Plans premiums could rise by as much as 8% in 2023.

After you have calculated the effect of inflation and stock market declines upon your total retirement income, and your living expenses, it is possible to estimate the extent of damage that your retirement savings plan can contain. It will make you feel more confident in your ability to decide whether or not you should take corrective action. Knowledge is more powerful than panic and worry.

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