Two years ago, Americans spent about $1,000 less per month on food, shelter, and energy costs than they are today, according to calculations by Fox Business.
If you are still in your working years, you can offset costs by working additional hours, asking for a raise, or starting a side hustle. But those strategies may be less doable if you are in your retirement years.
We talked to several experts to get their take on the best strategies that retirees can use to manage the increased costs that come with inflation, and this is what they had to say.
Adjust Your Investment Portfolio
“It’s not just a buzzword; diversification is key,” said True Tamplin, founder of Finance Strategists. “Inflation can eat into the purchasing power of your money, so having a mix of investments helps.”
“Think beyond just stocks and bonds. Including assets like real estate or commodities in your portfolio can be a smart move,” he explained.
“These often have a different reaction to inflation compared to traditional stocks and bonds, sometimes even benefiting from it. For instance, real estate often appreciates in value during inflationary periods, offering a potential hedge,” Tamplin added.
Andy Chang of The Credit Review also recommends investing in Treasury Inflation-Protected Securities (TIPS). Chang says TIPS “offer a reliable way to protect your retirement savings from inflation. Their principal is adjusted semiannually based on inflation, protecting the buying power of your money.”
Dennis Shirshikov, Head of Growth at Awning.com and former Professor of Economics at City University of New York, also recommends investing in TIPS because they are “specifically designed to combat inflation.”
“Additionally, investing in sectors that typically benefit from inflation – think commodities, real estate, or even certain technology sectors – can provide a hedge against the diminishing value of money,” Shirshikov said.
Rent Out Part of Your House
Lyle Solomon, principal attorney at Oak View Law Group, a personal finance expert and advisor with 30 years of experience, says that one secondary source of income that retirees should consider is renting out a room in their house.
“If you have your own property, you can rent it during your retirement years or even before,” Solomon explained. “The rental prices mirror the local inflation, so you can rely on it as a reliable inflation hedge.”
“Even if you have a spare bedroom or a part of your property unoccupied, you can rent the space out. If your location is good, you will get many interested tenants,” he added.
Get Help from Your Home Equity
Given that real estate has seen a significant appreciation in recent years, Solomon says to use that increase in equity to your advantage.
“You should consider using your home equity for extra cash flow during your retirement years,” he explained.
“Take the help of real estate professionals or your financial advisor to research the value of your property. Then, with their help, review what options you have to access this funding to make up for the higher living expenses during inflation,” he added.
There are several ways to access home equity, including a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance.
However, one option that is only available to older homeowners is the home equity conversion mortgage (HECM), which is commonly known as a reverse mortgage loan. This option eliminates monthly mortgage payments while also providing access to that equity in the form of a lump sum payout, monthly installments, or a line of credit.
Delay Social Security Benefits
Americans can start collecting Social Security benefits when they turn 62, but their monthly benefits increase if they wait until age 70, the last year they can start claiming benefits.
“Every year beyond your full retirement age that you delay benefits, they increase by up to 8% until you reach 70. That locks in a higher lifetime income adjusted for inflation as the cost of living rises,” said Laura D. Adams, MBA, personal finance author and expert and host of the Money Girl Podcast.
Those who claim benefits at age 62 will face a penalty, which currently amounts to a 30 percent decrease in monthly benefits compared to what they would receive if they waited until they reached full retirement age. Full retirement age starts at age 66 or 67, depending on the year you were born.
But the Social Security Administration says that if you wait until age 70 to claim your benefits, you may see a 77 percent increase compared to what you would receive at age 62.
The SSA offers this example: if you receive $1,000 per month at full retirement age, you will only receive $700 if you start receiving benefits at age 62. If you wait until you are 70, you will receive $1,240. That’s a $540 difference.
The other advantage to waiting until you reach full retirement age is that you can continue to work without it affecting your Social Security benefits. Whereas, if you claim your benefits at 62 or before full retirement age and make more than a certain amount, the SSA will withhold some of your benefit payments.
Relocate
In 2023, there was a 44 percent increase in retirees who decided to move compared to 2022, according to data from the U.S. Census Bureau.
The top two states that retirees moved to were Florida and South Carolina, and the top two states where they moved from were California and New York — two states in the top five states for cost of living in the United States, according to Forbes.
New York and California are also in the top three for housing prices. South Carolina ranks 32nd and Florida 21st, according to Wisevoter.
In California, the median housing price is $793,600 and $649,000 in New York, according to Bankrate. By comparison, the median housing price in Florida is $405,000 and $360,800 in South Carolina.
“Where you live affects many aspects of your finances, including the cost of taxes, housing, transportation, healthcare, and other services,” Laura Adams explained.
“Living somewhere with a lower cost of living may help offset inflation,” she added.
There are 13 states that do not tax retirement income. Moving to one of these states may also help increase your monthly cash flow.
Convert Your Traditional IRA to a Roth IRA
There are two different types of individual retirement accounts (IRAs) that both offer tax advantages.
A traditional IRA allows individuals to make pre-tax contributions, meaning you pay less in income taxes on your current take-home pay. However, you will pay taxes on the money when you start making withdrawals.
Another option is to use a Roth IRA. With a Roth IRA, individuals make after-tax contributions, but you don’t have to pay taxes on any of the money when you start making withdrawals. This means that the money in a Roth IRA is tax-free.
Rikin Shah, founder and CEO of GetSure.org, says that if you have a traditional IRA you should consider converting it to a Roth IRA.
“This strategy involves converting a traditional IRA into a Roth IRA, potentially reducing future tax liabilities and providing tax-free withdrawals that are not affected by inflation,” Shah explained.
Most major investment firms will help you through this process or you can enlist the help of your personal financial advisor to guide you through this process.
Find Other Income Sources
“A great option for retirees who are struggling due to inflation is to get involved in gig work as a simple and low-stress way to earn some extra money on their own schedule,” said Jake Hill of DebtHammer.org.
“Luckily, this doesn’t have to be a traditional job. A great option for retirees to get some extra cash when they need it is to freelance their skills. For example, if they used to be a teacher, they can pick up some tutoring gigs. If they used to work in the business/finance industry, they can do some consulting,” Hill added.
Other options he suggested include guest blogging, Airbnb hosting, food delivery, and walking dogs.
“I recall a retiree who turned his woodworking hobby into a small online business. This not only provided him with additional income to buffer against inflation but also added a fulfilling aspect to his retirement life,” said Dennis Shirshikov, Head of Growth at Awning.com and former Professor of Economics at City University of New York.
Adjust Your Withdrawal Rate
Shirshikov also recommends revisiting and adjusting the withdrawal rate you are currently using for the money you are receiving from your retirement accounts.
“The conventional wisdom of a 4 percent withdrawal rate in retirement might not hold up in high-inflation environments,” he explained.
“For instance, a story comes to mind of a couple I advised who adjusted their withdrawal rate during an inflationary period. By slightly lowering their withdrawal rate and reevaluating their discretionary spending, they managed to preserve their principal while still enjoying a comfortable retirement,” he added.
Reevaluate and Stick to Your Budget
During an inflationary period, it becomes crucial to budget your expenses and strictly adhere to that budget.
“With the increasing rate of inflation, the best decision to make is to stick strictly to a budget and give less room for impulse buying,” said Mark Stewart, in-house Certified Public Accountant for Step By Step Business and an accomplished author and financial media specialist.
“It is also important that you reevaluate your budget to ensure that it accommodates mostly your needs and less of your wants,” Stewart added.
To assist with budgeting, Stewart also thinks it’s important for retirees to stay informed.
“Staying informed with the economic updates is a wise decision in retirement that can help you navigate inflation because then you can know what adjustments to make to your financial plan to protect the value of your money or even stay abreast with prices in order to create an effective budget,” he explained.
Bottom Line
While navigating retirement and inflation can be a source of stress, the good news is that there are several strategies retirees can employ to combat these challenges effectively, including diversifying their investment portfolios with inflation-resistant assets, seeking additional income streams, leveraging home equity wisely, and optimizing social security benefits timing.
Moreover, by embracing budgeting and exploring cost-saving measures such as relocating to more affordable areas, retirees can further enhance their financial resilience against inflation’s unpredictable nature.
Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
