Retirement spending strategies are on track, yet some Americans are scaling back on short-term expenses
As the cost of groceries, gasoline and other goods and services rise as a result of inflation, consumers across generational groups are responding to the pressure of reduced purchasing power by making changes to their day-to-day spending habits and adjusting their budgets. However, those in retirement are now confronted with a unique challenge: how to spend money in a way that both accounts for inflation and ensures retirement stays on track. Retirement spending strategies often follow an old rule of thumb known as the “4% rule,” but retirees today may want to identify a more dynamic spending strategy that accounts for lifestyle preferences and market conditions.
“For retirees, inflation risk is very real and can impact both how much retirees can withdraw from their portfolio and their lifestyle in retirement.”—Dylan Huang, Senior Vice President and Head of Retirement and Wealth Management Solutions.
“Inflation is one of the ‘big four’ risks in retirement – alongside withdrawal rate risk, longevity risk, and the risk that the timing of investment returns negatively impacts how long a portfolio lasts – but it’s been one of the least talked about in recent years because we’ve been in a protracted low-interest rate environment,” said Dylan Huang, Senior Vice President and Head of Retirement and Wealth Management Solutions. “For retirees, inflation risk is very real and can impact both how much retirees can withdraw from their portfolio and their lifestyle in retirement.”
Some retirees are scaling back on short-term expenses
New data from the New York Life Wealth Watch survey reveals that while some retirees are looking for ways to cut back, others aren’t making significant changes to their spending strategies. Roughly half of retirees (55%) are scaling back on short-term expenses, but a significant number (42%) are maintaining their pre-retirement lifestyle despite inflationary pressures. Among those that are making changes, nearly a third are cutting back on dining out (31%), nightlife (30%), and traveling (25%). When it comes to expectations for retirement among non-retirees, two-in-five respondents (40%) said they would like to maintain the lifestyle they have now in retirement, and another one-in-four (25%) said they’d like to downsize. Fifteen percent said they would like to increase their expenses.
The survey also showed that access to retirement resources through one’s employer played an important role in respondents’ retirement preparedness. When it comes to funding retirement costs, retirees are getting their income from 401(k) plans, Social Security and pensions. In fact, nearly half (49%) of retirees reported a pension as a source of income, followed by long-term savings like a 401(k) (38%) and guaranteed income like an annuity (19%). Forty-three percent reported other sources of income, like social security or disability.
How guaranteed income can help
Guaranteed income can play an important role in addressing retirement risks – including inflation risk. By leveraging guaranteed income as part of a retirement spending strategy, retirees can ensure a baseline level of expenses are covered, which mitigates sequence of returns risk early in retirement and as a result, enables the rest of the portfolio to be invested more aggressively within their overall risk profile with assets that might help hedge inflation over the long-term.
“Inflation is impacting all generations, but when it comes to retirement, the collection of unique risks and the long time horizon necessitates a unique approach for retirees. The key for retirees is to create a retirement strategy that provides reliable income sufficient to cover near-term spending needs – inclusive of reasonable inflation expectations and insulated from market fluctuations – so that they can remain invested with a portion of the portfolio in asset classes likely to hedge inflation in the long-run. By creating a steady stream of income, annuities can play an important role to help address changing market conditions and macro-economic factors which can arise, particularly over the course of a lengthy retirement,” said Huang.”
Inflation can cause short-term anxiety, but the good news is Americans don’t have to navigate these challenges alone. A partnership with a financial professional can ensure that short and long-term financial goals remain on track in any market environment.
This poll was conducted between March 23 and March 25, 2022 among a national sample of 4,416 adults. The interviews were conducted online and the data were weighted to approximate a target sample of adults based on gender, educational attainment, age, race, and region. Results from the full survey have a margin of error of plus or minus 2 percentage points.
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