Retirees: Assess How Inflation and Stock Market Volatility Have Impacted Your Finances

As more and more economic indicators show that we’re smack in the middle of a global recessionary period, what can retirees do to protect their finances?

by Sherry Hao, Controller, U.S. Money Reserve

The stock market is chaotic, inflation is rising, and the global economy appears to be teetering on the brink of a recession All these factors can have a profound and lasting impact on your financial health, in both the long and short terms. For younger workers, the economic impact of such wild numbers will likely level out over their lifetime. Still, the effects could be broad and deep for those who are either approaching retirement or who have already retired. If you fall into the second group, here’s what you need to know and do to protect your finances during this volatile time.

Understand the Current Economic Situation

When talking about financial health, it’s important to take both a big-picture and detailed view to understand what the current landscape looks like. The International Monetary Fund, or IMF, puts out a biannual forecast for the global economy, and over the past few months, this has been relatively dire. The release from July 2022 ran with the headline “Gloomy and More Uncertain.” The IMF cites everything from the continued war in Ukraine and reduced global output to higher-than-expected inflation in the U.S. and Europe as contributing factors that negatively affect the stability and the outlook for the global economy.

Nationally, here in the U.S., we’re currently struggling with the debt ceiling thanks to a gridlocked and divided Congress; we’re facing inflation at a 40-year high; and the stock market, as a result, is all over the place. The economic outlook for the U.S. has been mixed at best as housing prices and sales begin to stall and interest rates continue to climb to keep inflation at bay. At the same time, some metrics show that the measures the Federal Reserve has taken to curb inflation have had some influence. The indicators the central bank uses are all known as “lagging indicators.” That means the information is backward-looking and delayed by as much as a month, if not longer. Thus, the present-day economic conditions could be better or worse than they were just a month ago.

Therefore, it’s essential to understand where we are in the economic cycle and recognize that these fluctuations are relatively normal in the continual wax and wane of the global economy. While some data points to the economy worsening, there are also some bright spots on the horizon. Like a living, breathing animal, the economy is always in a state of change. The trick is understanding some key indicators and translating those data points into useful, actionable advice based on your own life’s circumstances. Read on to understand how the recent volatility has impacted your finances.

Get Started at Assessing How Inflation and Stock Market Volatility Have Impacted Your Finances

Understand the Basics

First, it pays to begin with an understanding of a few of your personal cash flow basics. If you’re a retiree, you should have a budget and a good idea of how much money comes in and goes out each month.

Second, realize that inflation means your dollars will not go as far as they did in the past. Over the last few months, when the U.S. has been facing record-high inflation, you probably found that you’ve been spending more than previously on basics like food, gas, water, and electricity. So you probably have a smaller spread (or even a negative spread) between what comes in and what goes out. You may have noticed that the debt you carry on your credit cards has gone up or that the cost of your adjustable loans has increased. These are just a few ways inflation can affect your day-to-day expenses.

It’s important to realize that you’re not alone in this experience. In fact, according to Bankrate, currently, 35% of Americans carry debt from month to month. Our debt load is quite high, too, with the average balance hovering around $96,000, according to recent data from Experian.

Second, inflation also affects the stock market, which is where most retirees put their money to continue to earn returns on their investments. As prices for consumer goods rise, consumers tend to cut back on various expensive purchases. As the Fed raises rates, the cost of borrowing becomes more expensive, which also curbs consumer spending on items like cars and houses. The higher rates also make carrying debt on credit cards more expensive. When consumers cut back on spending, it hurts corporate profits, revenue, and dividends, which in turn can make the stock market volatile. So if you’re reliant on regular dividends or planning on big earnings in the market, it’s probably time to reassess simply because of the current economic environment.

Take a Closer Look at Your Income and its Sources

If you rely on everything from Social Security to stocks, now is the time to reassess just how vulnerable your income might be to the factors discussed above. Social Security increases each year based on inflation numbers, so you should have noticed a slight uptick in the amount of money you got at the beginning of the year.

If you’re lucky enough to have a pension, you will likely notice that your pension check doesn’t go nearly as far as it once did, thanks largely to inflation. Pension payouts are locked in and don’t change or fluctuate based on the inflation rate.

If you are invested in a retirement fund and taking regular withdrawals, it makes sense to assess just how you might need to adjust those withdrawals to meet your regular expenses. Since inflation is up, you might need to consider taking more out. Also, take a closer look at how those retirement funds are invested so you can maximize your earnings in the account while protecting it from inflation. It pays to hire and talk to a professional to help you navigate your retirement fund’s subtleties and ins and outs.

As you take a look at your income and its sources, you may find that it’s time to reassess the mix of assets you hold and earn money on. You might consider a few moves to protect your income, like adding precious metals, which tend to hold their value a bit better than stocks during volatile times. Before you make any shifts in your portfolio, however, make sure you talk to your accountant or a financial expert to make a good choice about where to stash your cash to best meet your particular needs. Everyone is different, and it pays to work closely with experts who have your best interests in mind when making any new asset allocations.

Examine Where You Spend

Once you’ve got your head around your income and what it currently looks like in the economic environment we’re in, take a closer look at your spending. Are there any places you could cut back on spending or reduce your outlay without sacrificing your core needs or your quality of life? These are important questions to ask yourself, regardless of whether the economy is down or up.

Consider keeping your core needs intact — healthcare, food, shelter, and transportation are core to daily living. The prices of these items have all gone up in the current environment, so you may need to cut back on any extraneous spending you had before the current economic issues arose.

Additionally, you should look closely at where these price increases leave you against your longer-term goals in retirement. If you’re drawing the funds down much faster than you anticipated because of the current volatility in the market, then you probably need to work with a professional to figure out how to rebalance your portfolio to ensure that you have enough money in the long term to keep you healthy, happy, and safe in retirement.

The Bottom Line on Assessing How Inflation and Stock Market Volatility Have Impacted Your Finances

Knowledge is power. Knowing where your money comes in and where it goes out is key to ensuring that you have plenty of income well into the future. Burying your head in the sand and ignoring negative economic indicators, rising prices, and the volatile stock market can only hurt you in the long run. But facing the current reality by assessing your income and your outlay can make a world of difference in the level of comfort you have in retirement.

In addition, it also pays to keep an open mind about potential diversification strategies or shifts you need to make to your lifestyle to ensure you have enough money for the long term. By paying attention and regularly assessing your portfolio and your budget, you can help stave off some effects of stock market volatility and protect your income from inflation. Follow these tips, and you’ll sure to start down the right path to long-term retirement happiness, health, and well-being.