Retirees on edge over inflation and stock volatility can take these 5 steps

With inflation up 8.6% in May, those who have set aside some cash may be in a better position than others. Whatever your situation, staying disciplined in times like these can make a difference in the long run, experts say.

“Work with what is in your control rather than rejiggering an investment portfolio at this time,” says certified financial planner Judith Ward, vice president and thought leadership director at T. Rowe Price Advisory Services.

Ideally, you have a “cash cushion, sleep-at-night money,” she says. That can mean one to two years’ of income needs. “That’s your reserve, your safety net to get you through these times,” she says.

In a time of rising inflation and market volatility, financial experts agree that focusing on what you can control rather than making significant changes in your portfolio is your best option. “A big mistake right now is to make big changes or permanent changes to your portfolio,” says Daniel S. Lee, director, financial planning and advice, BrightPlan, a financial wellness benefit provider based in San Jose, Calif. “The natural thing is to feel like you have to do something. If you’re nervous or uncomfortable, cut back on expenses,” he says. “It’s not all or nothing.”

Read: What’s happening with my 401(k)? How to handle your investments when the world is going haywire

Even retirees who are in a stable financial position are doing just that. Ilene, who is in her late 70s, and her husband, have opted to travel this summer to meet his sister. Yet, rather than fly to Reno to meet in Lake Tahoe they decided to fly to Los Angeles, and meet her there. “We looked at a number of travel sites for flights to Reno and LA,” says the retired speech pathologist who preferred to remain anonymous. They realized flying into Reno was “prohibitive compared with LA.” She figures they saved about $1,000 on round-trip airfares for the two of them.

Some financial experts suggest harvesting portfolio losses and gains, but Ward, who has completed research on two long-term retirement periods, says “you can harvest losses,” but you won’t benefit from a market upturn if you do.”

Typically, retirement lasts somewhere between 20 and 35 years, depending on your longevity and when you leave the workforce for good. Ward has studied the period from 1973 to 2003 as well as the 30-year period beginning in 2000, which will end in 2030, eight years from now. She is at work now on a third period that began in 2008. “The idea of retirement itself may be overwhelming for many investors,” she writes in the 2020 T. Rowe Price report, “Facing Retirement in a Down Market: A conservative withdrawal approach is part of a sustainable retirement spending plan.”

“History has shown that bear markets have typically been followed by healthy market recoveries. While investors are in the thick of market downturns, it may be difficult to stay the course and believe things will turn around.”

Yet, “don’t make rash decisions,” Ward says. “Try to stay invested.” If you feel the need to do something, think carefully before you sell equities during market volatility. “Selling when you still have a profit” can be an option. Yet, if your portfolio is 60% stocks to 40% bonds, even when the market falls, your portfolio will tend to “rebound quicker,” she says. Typically, a 60-40 portfolio tends to recover in one to two years, she says.

Read: What should investors do now?

 Overall, the key to riding out the combination of market volatility and inflation in retirement is having a good plan and sticking to it as much as possible. Typically, a good plan means you have “one to two years’ of cash cushion,” Lee says. “Discipline is so important. If you continue to tinker with your portfolio, it can hurt more than help” over the long run. 

If inflation persists, “stay disciplined,” he says. “It’s not what clients want to hear.” Yet, he tells them, “We have a plan and the plan is still good. Don’t make drastic changes.”

The 8% increase in inflation year-over-year may not affect retirees so much, Lee says. For example, if a retiree has a fixed-rate mortgage or has paid off their mortgage, their housing costs may not be impacted as much as their energy bills or the cost of buying a new or preowned vehicle. Inflation is “not impacting your finances as much as you’re reading in the headlines,” he says. Look at your “personal rate of inflation,” which depends on your individual financial situation — what resources you have and how you are spending your money. The 8-9% inflation “may not be as high for a retiree,” he says. Yet, “inflation impacts lower income families more” than those with more resources, he says. 

Here’s are tips for this period of inflation and stock market volatility:

Consider all your sources of income. “Most retirees have different sources of income,” Lee says. They include: Social Security retirement benefits, a pension or more than one, portfolio income – interest, dividends, and if you sell, capital gains, possibly rental income from investment properties. Social Security and some pensions are adjusted for inflation as well.

Reduce your expenses. “Rather than sell stocks into a decline, pull other levers,” says Vanguard’s Pilkington. “Evaluate where you’re spending your money. Make small adjustments.” If you look at your expenses in detail there are bound to be some ways you can cut them. “Look at your essential versus discretionary spending, says T. Rowe Price’s Ward. Look at all your subscriptions, your internet service, dining out multiple times per week, even those routine lattes or mochas. If possible, postpone large expenditures such as a new vehicle. “It doesn’t have to be forever. It can just be for the short term,” maybe a year or two, she says. 

Take a long view. “The key here is if you had some confidence, some degree of confidence in your plan in the beginning of 2022, in a good scheme not much has changed. It’s a bump in the road,” Pilkington says. “Stay focused on the long run. Make minor course adjustments in your spending. Making considerable adjustments (to your portfolio) is more concerning,”

Keep total portfolio expenses low. These expenses include management fees, fund expense ratios, trading costs, and tax costs on funds with high, and often, unexpected capital-gains distributions, Pilkington says. If you are actively trading, the tax costs can be high as well.

Mutual funds and exchange-traded funds (ETFs), for example, have expense ratios that measure how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio of 0.05%, for instance, for an actively managed mutual fund is low.

Minimize your taxes. If you are spending down, “keep your tax bite low,” Pilkington says. If you reach age 70 ½ after Dec. 31, 2019, you are not required to take required minimum distributions (RMDs) until you turn 72.

Read: Is now a good time to do a Roth conversion?

If you need cash from a retirement account, your Roth IRAs can be a place to go. You’ve already paid tax on these accounts. Yet, the Internal Revenue Service has rules on Roth IRA withdrawals. The distribution must be made five years after the first tax year during which a contribution was made to a Roth IRA set up for your benefit. If you have converted a traditional IRA to a Roth IRA, there is another five-year rule that requires you to wait five years before you withdraw converted funds or earnings, or face a 10% penalty when you file your tax return. Also, if you’ve reached age 59 ½, you avoid the 10% penalty for early withdrawal.