How Inflation Hits Retirees Differently Than Everyone Else
When inflation rises, pretty much everyone in the U.S. feels the burn. But obviously, those who aren't tremendously wealthy feel it the most and most retirees are not tremendously wealthy; in fact, according to a study by The Senior Citizens League, most seniors rely on Social Security ($994 monthly for one individual or $1,491 month for a couple, per the SSA) to get by.
How does inflation hit retirees differently than it hits everyone else? Why can it fuel financial insecurity? We spoke with Alex Langan, chief information officer and financial advisor at Langan Financial Group LLC, to find out.
Read on to see what Langan had to say.
Assets Acquired in Your Working Years Aren't Worth as Much
When you're not yet retired and working, you're in the game of earning for retirement, meaning you're investing in assets like stocks and bonds, etcetera.
When you're retired you've likely passed the buying phase of your life and moved into the selling phase. Most retirees are selling assets bought long ago for less money than is needed for a comfortable life today, because assets typically do not keep up with inflation (though there can be exceptions with, for example, real estate).
"Younger people are still buying assets that tend to rise with inflation," Langan said. "Retirees are selling those same assets to fund their monthly bills. That timing mismatch is what makes inflation particularly difficult early in retirement."
Social Security 'Raises' Do Not Keep Up With Inflation
The Social Security system as it stands makes inflation even more painful for retirees than others. This is because cost of living adjustment (COLA) bumps fail to keep up with most retirees' spending needs.
"The cost of living adjustment is based on a government index that tracks what working people spend money on, not what retirees actually spend money on," Langan said. "Retirees spend a much bigger share of their budget on healthcare and housing, both of which tend to rise faster than the index captures."
So, while COLA is essentially framed as a Social Security "raise," it falls short of the income boost retirees actually need to cover the rising costs of essentials.
"The Senior Citizens League tracked this over more than a decade and found that Social Security benefits have lost roughly 20% of their real purchasing power since 2010, even with a raise every single year," Langan said. "You can get a raise every year and still fall behind."
You Can't Negotiate for Better Pay Anymore
Unlike folks in the workforce, retirees can't negotiate for better pay. Social Security is what it is — and it's running out of money, so there's a quiet implication that retirees should be thankful for what they get while funds are still available. But again, those funds are just not enough to keep up with inflation.
"Someone still working can negotiate a raise, change jobs or take on extra work," Langan said. "Those options shrink fast once you retire."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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