The 2022 economic climate was bumpy for most, and in some cases even bumpier for retirees. Americans and the world at large dealt with the economic ramifications of the Russia-Ukraine war, post-pandemic industrial effects, and rising inflation and interest rates. As the year ends, it is important to understand how these factors affected your finances as a retiree
1. Inflation Pinched Pockets
Between 1991 and 2021, annual inflation averaged 2.5%. That’s close to the Federal Reserve’s stated 2% target rate and is indicative of a healthy economy.[1] But, that number spiked to as much as 9.1% in 2022. Food, energy, commodities like timber and nickel, wages, and rent all spiraled higher. The cost to exist jumped in a way that we haven’t seen in forty years.
Personal savings rates were cut in half as the need to cover costs and immediate spending needs prompted increased withdrawals from retirement accounts for many. That was an especially bitter pill for retirees.
Sadly, inflation is still above 6% as we enter 2023 and the Federal Reserve is still raising interest rates. There may be more pain to come and even more excess withdrawals this year as the battle against inflation continues. It may be worthwhile to review your financial position if you’re spending down your assets faster than you originally planned. Spending more than about 4%/year can imperil your long-term retirement success, though there are ways to help mitigate the impact of inflation that don’t equate to spending less and cutting back your standard of living. Contact us or your advisor to discuss ways to reposition for higher withdrawals.
2. Interest Rate Hikes Hit Retirement Accounts
To combat high inflation, the Federal Reserve increased borrowing costs six times last year. Hikes in interest rates incited fears of a recession and led many investors to pull out of the market. This helped accelerate the drop in the value of stocks and bonds.
If you’re like most, you held some declining stocks and bonds in your IRAs, 401(k)s, and other retirement accounts. In 2022 alone, the value of an average 401(k) dropped by 25% and the value of pension funds declined by 15%.[2] This just magnified pain. Living costs were soaring while the assets used to pay those costs were seeing sharp declines. You likely had to eat some of your losses (i.e. sell without having the time to recover) if you retired or were already retired in 2022. And those sunk losses increase your risk of early fund depletion.[3]
Apart from affecting your retirement funds now, these factors could also alter your outlook on your future. Some may be concerned that they may not have what they need to avoid outliving their savings in retirement. Others may not know how best to adjust for inflation or what further strategies to employ to enable a comfortable retired life. These concerns are best raised with a financial professional. Talk to us today to receive guidance that empowers you to get into 2023 with a solid financial plan.
[2] https://www.benefitspro.com/2022/10/18/the-average-401k-plan-is-down-34000-or-25-in-2022/
[3] https://www.cnbc.com/2022/05/24/why-2022-has-been-a-dangerous-time-to-retire-and-what-to-do-about-it.html
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