Inflation Is Really Sticking It to People in Retirement

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The ruinous inflation that’s crippling the purchasing power of every American is, tragically, hitting retirees extremely hard.

Not only is retirees’ fixed income failing, by a wide margin, to keep up with the rapid price increases that we’re currently experiencing, but most retirees’ investments are performing horribly. 

As a result, the 1970s-like stagflation which has been imposed upon us, largely due to Washington’s egregious errors, is dramatically lowering retirees’ living standards and their overall quality of life. 

Indeed, in the current environment, many people will either need to come out of retirement by returning to the workforce, make other bad choices, or find a way to dramatically improve the returns on their investments.


Retirement Is Getting Much More Difficult


Let’s examine the impact of today’s miserable economy on the financial situation of a fictional retiree. 70 years old and divorced, Jim lives alone in a retirement community. To support himself in 2021, he needed $100,000 before taxes. According to the government, which is reporting that costs are rising at an annual rate of 8.6%, he will have to generate $108,600 of gross income this year. (The government’s inflation estimates are scandalously too low, but that’s another story.)

Jim received about $35,000 of Social Security last year. After the 5.7% cost-of-living increase that the government applied to Social Security payments in January 2022 (that is the actual amount by which the benefits were raised), he will obtain roughly $37,000 from Social Security this year.

In 2021, Jim’s investments were worth $2.5 million. Utilizing a traditional investing approach, Jim had 60% of his funds, or $1.5 million, in stocks and 40% of his money, or $1 million, in bonds and fixed income instruments.  

Let’s say that his stocks had a dividend yield of 2.5%. Meanwhile, we’ll assign a realistic yield of 3.5% to his bonds and fixed income investments.  

Based on those figures, Jim earned $37,500 from his stock dividends and $35,000 from his bonds and fixed income assets in 2021. That adds up to $72,500. The yield on Jim’s investments, combined with his $35,000 of Social Security benefits, gave him $107,500. Since he needed $100,000 of gross income in 2021, he was able to meet his goal and maintain his standard of living.

Unfortunately, in the first half of 2022, Jim’s stock portfolio performed roughly in-line with the S&P 500, meaning that it fell by a total of 18%.

Moreover, in a largely futile effort to outperform the market and reduce his losses, he made many changes to his stock portfolio. Most importantly, he sold a number of his defensive, high-yield stocks and bought some growth names, such as Apple and Amazon, that he thought were undervalued. Since these growth stocks do not pay any dividends, his dividend yield for 2022 dropped to 1.5%.  

So the value of Jim’s stock portfolio has dropped to $1.23 million, and he is on track to earn just $18,450 of dividends from it this year. Conversely, due to increased interest on fixed income instruments, the money that Jim will earn from the bonds and fixed income side of his portfolio is poised to increase by 5% this year to $36,750.

In 2022, he’s on track to earn income of about $55,000 from his investments. After adding in his $37,000 of Social Security benefits, we calculate that Jim’s total income in 2022 is slated to come in at just $92,000. As a result, he is poised to earn over $16,000 less than he needs to maintain his quality of living standards and his quality of life.

Four Bad Alternatives and One Good Alternative 

The horrible economy foisted upon us by Washington’s policies, which have led to a tremendous acceleration of inflation that no one expected or planned for, has forced Jim to make a choice. Specifically, he can lower his quality of life, get a part-time job, liquidate some of his investments, borrow money, or improve the quality of his investments.

No retiree, of course, wants to lower his or her quality of life or obtain a part-time job, Liquidating investments at a time when both stocks and bonds have fallen sharply, leading to a 20% plunge in the value of the average 60%-40% portfolio, is not an attractive alternative. And borrowing money when interest rates are climbing sharply is not a great idea either.

So in our current troubled times, Jim and all of the country’s real retirees with significant savings and investments have only one good choice: Find a way to improve the quality of their investments.

More about Author, Ed Butowsky: https://linktr.ee/edbutowsky
Making Sense with Ed Butowsky video channel: https://www.youtube.com/channel/UCQO3uuHbcHof7v2o6L3De0A
Chapwood Investments