Mitigate Inflation Risk in Retirement

I swear that when my kid borrows my car, somehow, my gas just evaporates. Last week I had to meet some clients in my Duxbury office. I hopped in and turned the key only to find the needle resting on E. It’s good that gas is so cheap right now. Filling the tank wasn’t as painful as it could have been, even a few months ago.

Even with the lower prices at the pump today, we pay a lot more for gas in 2019 than we did 50 years ago. In 1969, the average gallon of gas was 35 cents. And 35 cents in 1969, adjusted for inflation, works out to be $2.35 in 2019. That’s actually pretty comparable to the national average today – about $2.26 for a gallon of regular unleaded, according to AAA.

The increase in the prices of goods and services is the basic foundation for inflation, and any sound retirement system must incorporate inflation risk mitigation strategies. Because the money you retire with on day one is not going to be worth as much in the years that follow.

You see, the impact of inflation is magnified over time. Inflation typically only rises a couple of points or so each year. However, over time that cumulative change can clobber your spending power. From 2008 to 2018, for example, the cumulative rate of inflation in the U.S. was 16.6% according to the Consumer Price Index maintained by the Federal Bureau of Labor Statistics. That means an item that cost $100 in 2008 cost $117 last year. Similarly, a dollar in 2019 won’t buy as much in 2029 or 2039.

Despite the apparent risk inflation poses to retirement, it may surprise you to learn that only about half of retirees (55%) calculate the effects of inflation on their retirement system, according to the Society of Actuaries.

We’re living longer than ever in retirement. Retirees today may expect to live another 20 or 30 years, and we need to have an investment strategy that can accommodate that. Assume that throughout your retirement, things will cost more and that you’ll have to give yourself a raise over time, to help keep up with rising costs.

Historically, expenses will increase by about 3% each year. It is a good idea to run several projections to see how your savings will be affected by different rates of inflation. You may discover that you will need more money over time, or you may realize that life in retirement may require to reset your spending habits altogether.

Understand that a retiree’s spending in retirement may change. In fact, according to the Employee Benefit Research Institute, retired households typically spend about 80% of the amount they did when they were still working. That number decreases over time, to 50-65% of their pre-retirement income. During the early years of retirement, many folks tend to spend more – traveling, being active, enjoying what life has to offer. As we get older, we tend to slow down, stay home more, and shop and travel less frequently, spending less on food, clothes, taxes, and housing. While our spending may decrease during this time, other expenses, such as health care, creep up.

One key to managing inflation risk is to keep your perspective fixed on long-term results and to choose investment strategies that will help to keep pace with inflation. We often see that many folks approaching retirement or in retirement will use money markets, CD’s and similar financial instruments as “safe” investments.

That risk mitigation strategy generated inflation-hedged rates of return in previous decades. But as a modern strategy, it barely keeps pace with or falls behind the rate of inflation. In other words, while you may be making somemoney, what we often find is that this strategy actually losesmoney with respect to the future purchasing power of a buck.

Particularly when one is either transitioning from the wealth accumulation to the distribution phase, or is already in their distribution phase of their financial lifecycle, suffering an investment loss can be devastating to one’s long-term retirement strategy. Many retirees will try to minimize investment risk as much as possible.

Folks, I get it.

But trying to outpace inflation will require some risk. This is why infusing Downside Risk Mitigation Modeling (DRM2) into your retirement system can be critical to any sound retirement system. While growth and risk often go hand in hand, instituting DRMis fundamental to help manage investment and inflation risk associated rates of return.

This is why a rules-based investment system that incorporates DRMcan lead to higher probability to financial success. A successful investment strategy must have rules in place to capture upside returns when market momentum is on its side. However, a successful investment strategy also has rules in place to help mitigate loss by transitioning to “safe harbor” investments to help preserve capital when momentum is not on its side.

After finishing 2018 as one of the worst quarters in years, now is a good time for you to define your rules. If you seek financial advice in 2019, make sure to find specialists who instill Downside Risk Mitigation (DRM) techniques into your investment strategy, to help you manage your investment and inflation risk associated rates of return.

Failing to account for inflation may make your retirement plans run out of gas long before they need to. Employ smart investment strategies that can beat the rate of inflation while mitigating downside risk. Understand that your spending needs will change during retirement, and plan accordingly. That way your investment strategy can give you the growth you need to enjoy your savings throughout your retirement.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at

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