For many of those retirees, the potential to draw income from elsewhere — such as savings, investments and home equity — is modest. Seniors with average household income of $29,000 a year, for instance, have an average net wealth of $278,742, according to the Center for Retirement Research at Boston College, which based its calculations on the Federal Reserve’s 2019 Survey of Consumer Finance. Those earning just under $15,000 a year had an average net wealth of $123,841.
In another SCL email survey, when retirees were asked what financial changes they made since the pandemic started, 34% said they had tapped their emergency savings while 19% said they applied for food assistance (SNAP benefits) or visited a food pantry. And 19% said they had to draw down more from their retirement savings than they planned.
Some inflation relief may be in sight
As a result of the spike in inflation this year, retirement experts now expect the next cost of living adjustment to Social Security benefits will be the largest since 1983. The SCL and the CRR both estimate benefits could rise by roughly 6%, an increase that would show up in Social Security checks next January. (The official COLA will not be announced by the Social Security Administration until October.)
The first is rising Medicare premiums, which are deducted from one’s Social Security check and reduce the amount left over to pay for other essentials.
And the second is taxes, since the threshold for family income that determines whether a portion of your Social Security benefits will be taxed is not adjusted for inflation. So as your check grows, so too will the chance that you will owe income taxes on a portion of it.
Playing it too safe presents its own risk
So for very risk-averse retirees, managing the savings they have for maximum return is especially tricky these days.
So what’s a risk-averse retiree with modest means to do?
William Nunn, a fee-only certified financial planner who founded Horizon Financial Planning in New Orleans, recommends retired clients have at least six months’ worth of their bill payments in cash.
Given how low interest rates are, he prefers putting that money in savings accounts over CDs to avoid the penalty that you may incur if you have to pull money out of a CD before it comes to term. “It’s not worth the risk of losing the CD interest you earned to break it. And if you do, you also may have to pay a fee,” Nunn said.
Beyond money for bills and any other funds stashed in a liquid account for emergencies, retirees who are keeping the rest of their savings in bonds and cash-equivalent assets may be taking on more risk than they realize, SCL’s Johnson said.
“The low interest rates are taking a huge toll on retirement plans. And retirees who are invested in CDs and bonds are not getting the type of return they need to make savings grow and last through retirement. That means more people have to turn to equities and investments such as real estate.”
While that will entail more risk and volatility, it may offer the best chance of beating inflation over time if you invest funds you won’t need for five or more years to those asset classes.
While it would be optimal, the goal is not for every dollar saved or invested to outperform inflation so much as it is for your retirement savings as a whole to do so over time, Nunn said. “You should view your portfolio in terms of a total return.”