Retirees Should Gird for a Long Run of High Inflation. Here’s How.

First consider the dynamics: Inflation rose to a 41-year high of 8.6% in May from the same month last year, yet Social Security recipients got only a 5.9% boost to their benefits for 2022. Although the Social Security cost-of-living adjustment stands to climb next year, it might be too late to help people who’ve had to raid savings to cope with higher prices. About 1 in 5 Social Security recipients drained a retirement or savings account over the past 12 months, according to a recent poll by the Senior Citizens League.

Meanwhile, there have been few places to hide in the markets. Stocks and bonds have both posted steep losses, and the 60/40 stock-and-bond portfolio that has long been a common allocation strategy was down an annualized, inflation-adjusted 8.75% as of the end of May, according to Morningstar. What’s more, this is playing out as investors fear the central bank could tip the economy into a recession as it raises interest rates, including a 0.75 percentage point increase Wednesday. 

In these uncertain times, then, financial pros say it’s important to control what you can. 

Deposit Yields

A good place to start is to make sure you put your cash to work. Online-only savings accounts are offering yields of around 0.90%, and those rates are expected to continue to rise throughout the year as the Fed tightens monetary policy. 

Switching your savings away from a legacy bank offering 0.01% can give you more bang for your buck. If the option to visit a branch is important to you, smaller community banks and credit unions generally offer more competitive rates than the big banks, said Greg McBride, chief financial analyst for Bankrate.com.

Credit Rewards

A rewards credit card that gives a percentage of the amount spent can ease the sting of paying more for necessities like food and gas. ”If you’re only using a bare-bones card, you’re leaving money on the table,” said Sara Rathner, credit-cards expert at

NerdWallet
,
a website that reviews financial products and receives compensation when someone signs up for them. Credit-card companies look at your income when you apply, but Social Security counts, as do dividends and other sources of retirement income. 

One of NerdWallet’s picks, the Bank of America Customized Cash Rewards card, allows you to earn 3% cash back on your choice of one of six spending categories: gas, online shopping, dining, travel, home improvement/furnishings, or drug stores. 

Manage Care

Unlike, say, Medicare Part B premiums, which are fixed, you probably have some control over what you pay for your medications. And that’s a good thing given that prescription drug prices have increased 35% since 2014, while the cost of all goods and services has increased 21%, according to a report from GoodRx Research. 

First, if your drug plan has a preferred pharmacy, make sure you’re using that, since that may save you money on your out-of-pocket costs.

Also, ask your pharmacist the cheapest way to fill your prescription, said Rathner of NerdWallet. In some cases, you might save money by bypassing your insurance and paying cash instead.

GoodRx

offers discount coupons (not to be paired with insurance) that may lower the price below the typical Medicare Part D co-pay for certain medications.

Costco

has a discount prescription program for its members. Some pharmacies, including Walmart’s, offer certain generic medications for as little as $4 a month, so ask if your pharmacy does the same.   

Cut Back

To cope with rising prices, the retired clients of advisor Jaime Quiros are belt-tightening instead of withdrawing more from their retirement accounts. Some are skipping withdrawals and living off bank accounts that are more flush after the pandemic depressed spending. 

 “They’re worried,” said Quiros, senior portfolio manager of FBB Capital Partners in Bethesda, Md. His typical retiree portfolio is 50/50 stocks and bonds, or 60/40 stocks and bonds, and both asset classes have slumped this year, with the

S&P
500 down about 21%, the

iShares 5-10 Year Investment Grade Corporate Bond
ETF (ticker: IGIB) down around 14%, and the

iShares U.S Treasury Bond
ETF (GOVT) down around 11%.  

While such across-the-board declines are unusual in a diversified portfolio, investors should resist the urge to bail out. Even in a down market, some investments will perform less badly than others, said Marta Norton, chief investment officer for the Americas at Morningstar Investment Management. “I don’t think it’s worth throwing the baby out with the bath water,” she said. 

Invest Strategically

Damage mitigation is key as bear markets are temporary, and your portfolio will need stocks’ growth to keep pace with inflation over the long term. On the fixed-income side, one consideration might be Treasury Inflation-Protected Securities, or TIPS, which are government bonds whose principal increases with inflation as measured by the consumer-price index. The historical average of 10-year TIPS since 1997 is 1.44% versus 0.72% today.

Norton said she doesn’t consider the yields on TIPS attractive relative to historical levels, yet since these bonds can benefit if inflation comes in higher than expected, she sees value in holding a modest allocation in today’s uncertain environment. Quiros’ clients hold between 2% to 8% of their bond portfolio in TIPS. 

Pursue Perspective

When clients worry whether their money will last, it can help to show them how their portfolio will perform under various market scenarios, Quiros said. 

Advisors have financial planning software that can run thousands of scenarios and show their clients’ probability of running out of money in each. Knowing they have a good likelihood of weathering even a worst-case scenario can give investors peace of mind, he said.

Write to elizabeth.obrien@barrons.com