It’s hardly a secret that inflation has been wreaking havoc on consumers for over a year. And while the Federal Reserve is doing its best to fight inflation by aggressively raising interest rates, we don’t know when the cost of living will start falling again.
As a result, many people are struggling to make ends meet these days, and the same is true for retirees on a fixed income. In fact, many seniors get most of their retirement income from Social Security. And although these benefits saw a 5.9% cost-of-living adjustment through 2022, the inflation rate has far outpaced that boost, leaving seniors at a clear disadvantage.
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So it’s not surprising to learn that, according to a recent nationwide survey, 66% of retirement savers aged 45 and over are concerned about the impact of inflation on their retirement. If you’re concerned that the rising cost of living will leave you cash-strapped as a senior, there’s an important step worth taking.
Build a solid nest egg and invest aggressively
Social Security has historically done a poor job of helping seniors keep up with the rising cost of living. Furthermore, these benefits were never intended to completely replace retirees’ previous income. So if you want to reduce the likelihood of inflation messing up your retirement, your best bet is to establish another income stream that’s better equipped to fight it. That’s where your nest egg comes in.
If you make a point of consistently putting money into an IRA or 401(k) plan throughout your working years, you have extra income to tap into at a time when your Social Security benefits may not be enough. But it’s not enough to simply save money for retirement and call it a day. You also need to invest that money to make it grow in a way that outperforms inflation.
In most cases, that means investing heavily in stocks until retirement. From that point on, it’s worth switching to less volatile assets like bonds so you don’t take on excessive risk. But let’s say you manage to save $400 a month for retirement over a 40-year period. If you’re heavy on stocks, you might manage to earn an 8% average annual return on your retirement plan, since that’s slightly below the stock market average. All in all, that would leave you with a balance of $1.24 million.
Now, a quick note about that 8% yield: this year, such a yield wouldn’t necessarily be enough to outperform inflation. But most years it would be like that. The rate of inflation in 2022 was truly extraordinary – and not in a good way.
A good way to allay your concerns
Rising living costs can easily eat into seniors’ incomes, leaving them cash-strapped and stressed. If that’s a scenario you want to avoid, make it a point to fund your own nest egg and invest it in a way that keeps inflation in the dust.
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