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Inflation is back, for now. Here’s how retirees can deal with it.

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By Erin Flynn Jay, Next avenue

Consumer inflation accelerated to an annual rate of 7.5% in January, the fastest pace in 40 years, according to the Bureau of Labor. Rising costs for food, energy and housing inflation have hit retirees on fixed incomes the hardest.

Like many people who are no longer working, 74-year-old Philadelphia resident Dolores Macrina said she was reluctant to offset rising prices by withdrawing more from her retirement savings account because her investments are doing poorly.

“The way it works – your income doesn’t go up, but all the prices go up,” she said. Like many older people, Macrina adapts by cutting back on her expenses.

“I’m on the generous side with churches and (charitable) benefits, but now I have to change that,” she said.

Another Philadelphia resident, Cecilia Ruiz, 61, said she still thinks her monthly Supplemental Security Income check will cover her expenses, but it doesn’t. “The prices (in the markets) are outrageous and they don’t have half the produce,” she said. “My grandson drinks Enfamil (a type of formula) and we had a hard time trying to get [it].”

Make a short term plan

Brian Stivers, investment advisor and founder of Stivers Financial Services in Knoxville, Tennessee, said the most important thing retirees can do today is develop a short-term plan to deal with inflation. This may require postponing travel plans, changing the way they shop, rethinking where and how often they eat out, and cutting back on charitable donations and gifts.

“Taking the time to reflect on the life choices they make every day and decide what is essential, what they want and what they can give up, can free up the dollars needed to cover the added pressure of inflation,” Stivers said.

For many, the word “budget” can rob them of their joy in retirement. But budgeting is simply knowing your basic income and expenses for housing, food, and utilities, and then making informed decisions about how you want to spend the money you have left.

Budgeting can be as easy as 1, 2, 3

Stivers encourages retirees to take an hour or two to review their credit card and bank statements and jot down in broad categories how much they’ve spent in each category over the past two months. Categories should include gas, restaurants, clothing and travel.

Then he suggests labeling each item with one, two or three. Some are essential to the enjoyment of life. Both may not be essential but are really sought after. All three are things retirees can do without until inflation is back under control.

“Get rid of three immediately to see if that frees up enough monthly cash flow to absorb the higher costs of one and two,” Stivers said. “Common types of three for many people may include magazine subscriptions, premium cable channels, gym memberships, fast food tours, and day trips.”

Once you’ve dropped all three, Stivers advised you to watch your twos, or “wants”. One of the most important is the restaurant. To reduce these expenses, look for restaurant promotions, special offers and coupons for early risers, or decide once a week to get together with another couple at home instead of going out.

Another common “need” is to buy non-essential items like clothes, home decor items, and gifts for children or grandchildren.

“You don’t have to give up on this completely, just narrow down and search for malls, big box warehouses, or online discount outlets to find clearance items, ending sales season, etc,” Stivers said.

A big area where people can save is travel, he added. Look for destinations within an hour or two to avoid airfare, parking fees, and car rental fees, and use credit card points for hotels. Or try a staycation, relax at home, enjoy local attractions, and save a considerable amount of money in the process.

If you’re investing in the stock market, Stivers said you should consider investing in the “sector.” Invest in mutual funds or ETFs (Exchange Traded Funds) focused on sectors or industries that are more likely to do well in times of inflation because they provide goods and services that people cannot happen, such as energy, banks and consumer staples.

As the Federal Reserve raises interest rates to fight inflation, keep a close eye on what your fixed-rate savings are earning. Because the Fed cut rates to near 0% to forestall an economic slowdown that economists anticipated during the Covid-19 pandemic, Stivers said interest on most fixed-rate savings accounts went into below 0.5%.

A few simple tips to avoid inflation

Alternatives, such as short-term or fixed annuities that may currently pay 2-3% and are likely to increase due to the Fed’s rate hike, can make a difference. For example, Stivers said that if you have $200,000 in a bank savings account paying 0.5% per year, you can expect to earn around $1,000 per year.

But if you put that money into a three-year fixed annuity at 2.5% per year, your annual return will increase to $5,000 per year. The difference — $333 per month — can help offset higher fuel, food and clothing costs.

Social Security is indexed to inflation, which is good for retirees because it helps offset increases in the cost of living, said James W. Bryan, registered investment adviser at Cahill Financial Advisors in Edina, Minnesota. But that doesn’t always help entirely.

“Living within your means, following the advice of your doctor and dentist, being debt-free, and getting the best return available on your bank savings are all essential actions to keep money in your pocket,” a- he declared.

Many people think their retirement savings are safe if they are placed in federally insured savings accounts, certificates of deposit, or other investments where the principal is not at risk. But they still face the risk that inflation will erode the purchasing power of their savings. This is why advisors advocate diversity in investments.

“Having a well-managed retirement investment portfolio with a portion allocated to equities is one of the best ways to offset inflation,” Bryan said. “Regardless of risk tolerance, a portfolio should have some exposure to equities because they have historically proven to be a tremendous hedge against inflation over long periods of time.”

Risk-averse seniors who are more worried about stock and bond market volatility than losing purchasing power due to inflation may consider certificates of deposit. Bryan said some 12-month CD yields were slightly above 1.00%, which was not the case a year ago.

Series I Treasury Bonds Might Be Worth a Look

Another option to consider is Series I U.S. Treasury bonds, which pay both a fixed rate of interest for the life of the bond and semi-annually add a floating rate payment tied to the interest rate. ‘inflation. The combined yields for bonds issued from November 2021 to April 2022 were 7.12% over the last six months. I bonds pay interest for 30 years, but you can cash them out after 12 months. However, if you cash them before five years, you will lose the previous three months of interest.

Another budget tactic Bryan likes is to create separate savings accounts for fixed costs, such as transportation, property taxes and food.

“Having separate savings for three to six months of living expenses is also standard financial advice,” he added. “Creating separate savings accounts can help better manage the amount available for discretionary spending and entertainment.”

If you begin to experience financial hardship due to inflation, reduce the burden by making the necessary sacrifices to pay off consumer debt and a mortgage, and reduce or end financial support for adult children.

“Reducing residencies and opening up to adult children are starting points,” Bryan said. “It’s hard to change old habits. However, the outcome of these behaviors can be tragic and costly down the road.”