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Rising costs might not be as big a threat to your retirement lifestyle as you fear

Estate Planning Retirement Planning Investment Management Tax Planning

Concerns about rising inflation are everywhere.

If you're already retired and living off your investment income, you may be especially worried, regardless of the size of your nest egg.
Will your retirement plan be able to withstand higher prices? For how long? And how high will inflation go? Will it add to the volatility in the stock market? Will it prompt the Federal Reserve to raise interest rates sooner than expected? Perhaps most important, will it impact your lifestyle?
For now, even experts have more questions than answers about how high inflation will go, and what it means for the economy—and you. That's because inflation is made up of various components, some driven by short-term, pandemic-related factors and others that have been long-standing, like the rise in health care costs.
Here's how having a diversified investment plan—and the appropriate insurance and estate planning strategies—can help address some of your top concerns regarding rising prices and your lifestyle and legacy.

Should I change my mix of investments?

Most retirees already have some inflation-adjusted protection through Social Security, and some may have inflation-adjusted defined benefit pensions or annuities with cost-of-living adjustments.
If you assume that inflation will average 2% to 2.5% in the upcoming years, your investment goal would be to earn a return of at least that much or greater. If you think inflation is going to go up beyond that—either temporarily or long term—you may want to consider inflation-resistant investments for your portfolio and diversify across asset classes to help reduce inflation risk further. Because most economists don't foresee an extremely high level of inflation lasting for years to come, you don't have to drastically change your allocations if they are already diversified, for example, within our client accounts, we currently have modest exposures to investments that have historically done well when inflation has been rising. If the inflation outlook radically shifts higher because of unforeseen circumstances The same strategies would still apply. As long as you are diversified, you'll be doing all you can to hedge risks to inflation. Do keep in mind that diversification and asset allocation do not ensure a profit or guarantee against loss.

Should I have more in cash or less?

If you think your retirement lifestyle is going to cost more in the future because of inflation, your instincts might be telling you that you need more cash available for everyday expenses. For some retirees, that cash allotment is just a few months of spending, or maybe the amount needed yearly as a required minimum distribution from their IRA or 401(k) accounts.
For the more conservative, it could amount to a few years of living expenses or more, depending on how they feel about the potential for withstanding a market downturn. But assuming you have a solid cash plan in place now, you might want to consider doing just the opposite if you are particularly worried about inflation: Hold less cash and invest for growth potential.

How can I insure against the unknown?

Rising costs for a trip to Hawaii are one thing. Rising costs for prescription drugs and hospital care are on another level. Health care costs have been rising faster than the rate of inflation for years, and will likely continue to do so. Many experts estimate that an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement. And about 70% of those aged 65 and older will require some type of long-term care services.*
Depending on your needs and your financial situation, you might want to consider long-term care insurance. Even if you think you have enough to cover the costs involved, you may have to lower your standard of living or adjust what you plan to leave to heirs in order to spend more on health care, especially if that care is going to run higher than the industry averages.
You might also want to assess your life insurance and disability insurance needs, especially if you are still working in retirement in some capacity and count on that income to cover your spending.
Whatever direction inflation eventually goes, the key is having a plan that can enable you to live the life you want. Working with a professional can help you find the strategy that works for you. Your attorney and tax professional can help you consider changes consistent with your unique situation.