Retirees are pulling more money from their savings to manage the rising prices, raising the risk of running out of their nest eggs.
The increase in spending since 2021 shows just how tough inflation rate can be on people who are retired or about to retire. Increase prices can also erode the worth of the money and fixed-income investments that many retirees rely on in their near future, according to a study released by Boston College on Wednesday.
“According to Laura Quinby, a senior research economist at Boston College’s Center for Retirement Research and co-author of the study, experiencing High inflation later in life can really be harmful to retirement security.”
Despite a slight inflation from its peak of 9.1% pace it set for the 12 months ending in June 2022, it still exceeds the Federal Reserve’s 2% annual target rate. In April, prices increased 3.4% in April compared to the previous year, as reported by the latest Labor Department on Wednesday. This growth rate slowed down from a 3.5% pace in March.
Increased withdrawals are one of the reason Boston College projects that inflation caused a 14.2% decline in the financial wealth held of middle-income retirees between 2021 and 2025. (If rising interest rates lead to a recession, their wealth could drop 16.6%.)
The survey found the nearly a quarter of retirees and soon to be retirees changed how much they withdrew between 2021 and 2023, boosting their distributions by an average of $1,810 in each year.
Quinby looking at economic data and a November 2023 survey of 1,501 older adults to forecast the impact of high inflation on the purchasing power and wealth of people who are retired or near retirement.
Retirees’ incomes have also been hit when inflation-adjusted terms.
While Social Security is adjusted annually to account for the rising cost-of-living, there is generally doesn’t get and inflation adjustment for the pension income many retirees receive from their private sector.
Retirees Getting Through Inflation Rate
Wealthier Americans haven’t impacted by inflation.
The study predicts that inflation will cut the financial wealth of retirees in the top third of the wealth distribution by an average of 4.3% by 2025. Those in the bottom third, who depend more on cash and bonds for their retirement savings, are expected to see an 18.8% reduction by 2025 due to inflation. The wealthiest Americans usually invest more in stocks.
One positive aspect of inflation is that households with fixed-rate mortgages benefit, as their monthly payments remain constant, while their wages typically increase over time with inflation.
The study also indicates a worsening outlook for people nearing retirement, particularly those aged 55 to 61 who have full-time jobs.
From 2021 to 2023, 39% of people surveyed said they saved because of inflation, and nearly a quarter indicated they spent more from savings. This reduced savings is contributing to a projected 21.7% drop in financial wealth by 2025 for those in the bottom third of people nearing retirement.
Quinby mentioned that people still working could compensate by working longer, although this is not always feasible. According to the survey, about 4% of nearby retirees indicated they would keep working longer.
Retirees, on the other hand, have fewer choices, she added. “Our main concern, especially for retirees, is they have a lot less chances to compensate for this.”
The risks increase significantly when high inflation persist around for a long time, as it did in the 1970s.
According to Bill Bengen, who came up with a 4% retirement spending rule, which advises for spending 4% of your saving in the first year of retirement and adjusting the amount yearly to keep pace with inflation. The worst 30-year period to retire started on Oct. 1, 1968.
It was not 1968 itself that posed the problem, he explained, but the subsequent years, which included high inflation for much of the 1970s and consecutive bear markets beginning around 1969 and 1973.
