The U.S. has gone through massive crises that put a lot of households and businesses at rock bottom. It’s been over a decade since the Real Estate Bubble and the Great Recession. Yet their impact has been unforgettable. These are only two unforeseen events that sparked a surge of bankruptcies. And roughly a year before the pandemic, millions of Americans struggled to recover.
In 2020, the pandemic crisis transpired and scourged the U.S. economy. The restrictions led to limited operations across industries and overwhelming cash burns. In turn, millions of businesses had to shut down, either temporarily or permanently.
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It was most evident in the SME sector, with 9.4 million small businesses closing that year. Although the recession only lasted two months, the road to recovery was long and winding.
In the last two years, the economy has demonstrated a strong rebound. Thanks to easing restrictions that allowed business reopenings and increased operating capacity, unemployment was lowered, and the pent-up aggregate demand was fueled. At the end of 2021, GDP per capita reached $12,235, a 12 percent year-over-year growth. It even exceeded pre-pandemic levels with $11,300 on average.
Today, the U.S. is again facing a threat to its economic recovery. Inflationary pressures have stretched further than expected, peaking at 9.1 percent in 2022, based on a post published in Trading Economics. In response, the Fed made a series of interest rate increments peaking at 75 basis points. The effort is now paying off as inflation relaxes to 6.5 percent. However, one must not be complacent as rates may keep increasing to ensure macroeconomic stability.
Given all these factors, the labor market demographics have transformed. Retirement age is increasing along with prices. It is no surprise many would-be retirees are delaying their retirement. In fact, more than half of female workers decided to extend their working years. This is a logical choice since there are fewer revenue streams upon retirement. The last thing retirees need is cost-of-living adjustments.
Thankfully, they can get through life amidst market volatility. This article will discuss how retirees can cope with the impact of inflation.
Inflation Before and During the Pandemic
Inflation has always been one of the integral macroeconomic indicators in the U.S. economy. It has played a vital role in gauging economic performance and predicting crises in the last century. In fact, economists built theories that put inflation at the center. One of these was the Phillips Curve. Analysts observed inflation’s increased predictability after WWII and the Korean War.
In the following years, the Fed thought they had a grasp on inflation. They tried to use its impact on the unemployment rate. However, this was disproven after the sustained high inflation led to stagflation.
In the early 1980s, it was further proven to be meaningless as another massive crisis took place. Since then, the Fed went back to basics as interest rate adjustments remained effective. The inflation rate had become more stable and moved in a downward pattern.
In 2008, the Great Recession put millions of Americans into the gutter. Various factors contributed, but the real estate bubble was the primary driver. The effects of inflation were most evident in the commercial and residential property market. From 1996 to 2007, house prices rose by 124 percent. Even worse, the ratio of home prices to median income rose from 3:1 in 2001 to 4.5:1 in 2006.
People believed that real estate appreciation would continue, which encouraged adjustable-rate mortgages. But the lenders failed to account for the borrowers’ capacity to pay. By 2007, lenders had 1.3 million properties in foreclosure proceedings. And by 2008, home prices plunged by 20 percent.
Inflation effects on other industries should also be highlighted. The beginning of the recession was characterized by inflation rising above 5 percent for the first time in almost 20 years. In response, the Fed raised interest rates to help the economy cool down. It proved effective, but it led to contraction across industries.
Higher production and borrowing costs forced companies to lay off employees or shut down. In turn, the unemployment rate reached a new all-time high. The Bureau of Labor Statistics showed it peaked at 10 percent in 2009. This unprecedented event depleted the savings of millions of Americans. Retirees were the most affected and forced to delay retirement or return to work.
In the following years, the U.S. economy tried to regain its footing. Although the recession ended in 2009, the effects of inflation and interest hikes, unemployment, and the housing crash persisted. It was only in 2014 that the unemployment rate returned to pre-recession levels.
Analysts also became wary of another potential recession in 2015. The U.S. economy slowed down once again, although the global economy was far more sluggish. Thankfully, it quickly recovered, with the GDP growth rate rebounding to three percent. Median household incomes also bounced back to pre-recession levels in 2016.
Amid all these massive changes, we can identify one important thing. Inflation has not played by the rules since the aftermath of the Great Recession. For instance, the Fed has implemented expansionary monetary policies to stimulate activities. Yet inflation was of little concern as it remained within the two percent target. By 2018, the U.S. recovered as the GDP growth rate became more stable.
In 2020, the U.S. faced another recession when the pandemic hit. Pandemic restrictions led to limited operating capacity and net losses. They led to massive layoffs and business shutdowns. The stock market prices dropped instantaneously, although the rebound immediately followed.
In response, the Fed set interest rates to near-zero levels to attract business spending on investments and borrowings. All these events showed that inflation once again played by the rules.
Despite the pandemic restrictions, the U.S. economy found ways to withstand blows and bounce back. The third quarter of 2020 showed a slight recovery as businesses began reopening, thanks to digital transformation that empowered cashless transactions, hybrid work setups, and e-commerce.
Also, the pent-up demand across industries contributed to business reopenings. Therefore, in 2021, labor market conditions improved as unemployment decreased by 4.1 million.
The market improvement was most evident in real estate. When interest and mortgage rates dropped, more prospective property owners applied for loans. The expected property appreciation also drove this scenario.
As such, home sales soared and set the highest record in 14 years. In other industries, business reopenings increased as production costs and restrictions eased. The economy was poised for a strong and sustained rebound.
But only a year later, things seemed problematic for the U.S. economy. The Russo-Ukrainian War further aggravated the situation. Inflation is rising above pre-pandemic levels and stretching further than expected.
In 2022, it reached 9.1 percent, a new record high in over 40 years. Fuel prices have skyrocketed, leading to rising costs of production. This coincided with the clearing of supply chain bottlenecks. In turn, the softening of demand across industries sped up.
To stabilize market volatility, the Fed had to become conservative in raising interest rates. It made a series of interest rate hikes by 75 bps for four consecutive quarters. Fortunately, it proved effective by enticing more savings and limited borrowings and spending.
Today, inflation stays elevated but much lower than its 2022 peak. According to the same Trading Economics article, It continues to relax at 6.5 percent. The consumer price index (CPI) of 296.80 is also improving from the 2022 peak of 298.01.
Although it is only a 0.5 percent decrease, we are more optimistic about the macroeconomic conditions this year. Inflation and CPI may keep decreasing as the Fed ensures stability.
On the flip side, analysts worry about another recession. But it may not be deep since the 2022 inflation was more of a demand-pull than a cost-push. This is normal due to pent-up demand amidst economic recovery.
Market volatility has become more manageable since inflation has dropped nearly 30 percent. Also, continued interest rate increments are expected, but these may cool down as inflation goes into a lull. In fact, the Fed only set the Q1 2023 increase at 25 bps. In the second half, inflation may become more manageable.
Moreover, the current economic scenario differs from the Great Recession. There are various factors to consider, but this article will focus on the most obvious ones. First, property inventories remain low, so shortages persist even if sales cool down. We can attribute it to property builders remaining conservative after the Great Recession.
It seems as though they have not ramped up construction and leasing over the past decade. Second, lending policies are stricter regarding the borrower’s ability to pay. Third, there is no speculative mania in the capital market. Fourth, the Fed’s effort easily stabilized inflation. Lastly, the unemployment rate is still a far cry from the labor market conditions in 2008-2009.
Of course, cost-of-living adjustments may continue as the purchasing power of consumers remains low. Near-term economic projections remain bleak. But in 2024, the efforts of policymakers may start to materialize.
Retirees are Most Vulnerable to Inflation
The U.S. economy has gone through numerous massive crises, and retirees have always been one of the most vulnerable groups to risks. In the aftermath of the Great Recession, 25 percent of bankruptcy filings came from Americans aged 55 and above. Most of them were still working at that time. Many retirees had to deplete their savings accounts, borrow from predatory lenders, or return to work.
Today, another threat is here to disrupt their wealth management. Although the current market volatility is less risky, retirees must stay on the watch. Inflation remains elevated, raising the standard of living in the U.S. Also, healthcare costs are rising due to the combined impact of the pandemic and rising prices.
Currently, healthcare costs per person amount to $12,530 versus $11,462 in 2019. These events prove the importance of retirement planning and a consistent stream of retirement income. Sadly, the past decade has not been enough for many retirees to gain their lost retirement savings.
A recent survey shows over 70 percent of Americans have savings accounts. But inflation effects have been hard to tolerate. Another survey shows that 30 percent of American seniors have no retirement savings.
Meanwhile, only 27 percent have maximum savings of $49,999. Even worse, 70 percent of American seniors are stuck in debt quicksand. In the same study, almost two-thirds of them admitted to having moderate to high financial security.
Given all these factors, it’s unsurprising that many Americans rely on social security benefits. But with the increasing cost of living, the amount they receive may not be enough today. Note that the average life expectancy in the U.S. is 79, so retirement may last 13 years. Also, those at least 65 years old are more likely to get hospitalized.
So even with Medicare, healthcare and assisted living costs may not always be coverable. These figures show that many would-be retirees will have to adjust to the increasing standard of living.
American Retirees and Would-Be Retirees Can Get Through Inflation
This year, the annual cost-of-living adjustment (COLA) to social security benefits is 8.7 percent. This is one of the highest increments in over 40 years. It aims to cover the rising cost of basic goods and services for retirees.
However, living on fixed income streams can still be challenging when prices are exorbitant. Although inflation is easing, prices are staying higher than pre-pandemic levels. These circumstances may require retirees to consider these valuable tips to cope with market volatility.
Review and adjust your monthly budget
Whether a retiree or a would-be retiree, you must take some time to review your monthly budget and expenses. Doing so can help you determine what matters in your spending and increase savings. You may start by identifying your fixed and variable expenses.
Fixed costs refer to your constant expenses, which are part of your necessities or monthly expenses. These include water and electric bills, rent or mortgage, insurance expenses, and taxes. Rent and insurance expenses are most likely unadjustable. You can reduce your consumption to lower your water and electric bills. There are strategies and preparations to help you limit your taxes.
Meanwhile, variable expenses are those you can easily adjust. These include your spending on food, entertainment, and hobbies. Although food is a basic necessity, you can find ways to reduce your spending.
For instance, buying less red meat or opting to have your food delivered instead of buying ingredients and cooking them. This is more efficient if you are living alone. This way, you don’t have to spend money on transportation, gasoline, and electricity.
You can also limit your budget for groceries and decide what you often eat and use. Other variable expenses are optional, so you can limit your spending on them or avoid it altogether.
Review your expenses and identify those you buy the most. You may find ways to limit spending in those areas to restructure your budget plan. For easier calculation, add your fixed and variable expenses per month. You can average expenses in the last twelve months or focus on the most recent month.
Next, deduct the total amount from your monthly income. You are spending beyond your means if the difference is a negative value. It may push you to bankruptcy or debt quicksand. If the difference is a positive value, you are spending your income well. You can use the remaining amount to repay borrowings or add to your savings and emergency funds.
Protect against fraud
Aside from ensuring that you are spending within your monthly budget, seniors need to be aware of internet security. Economic downturns have shown to be linked to increased rates of online fraudulent activity.
Given their healthy financial savings, trusting nature and the fact that American seniors are a growing group of internet users, they are an attractive target for scammers. The FBI has estimated that more than $3 billion is lost every year by American seniors in financial scams including romance scams, tech support scams and lottery scams.
Internet awareness and protection is an increasingly important topic to discuss with senior online users. There are simple steps you can take to protect yourself:
- Check emails. Don’t open emails, download attachments or click links from unknown companies or addresses you have never corresponded with. If you have questions, contact the company directly through their website email address.
- Don’t share information. Do not give your credit card, social security or other personal information in an email, chat or over social media to an unknown person or company.
- Invest in security software. Protect your computer with anti-virus, security and malware software from a trusted cyber security company.
- Secure websites. Check the address bar at the top of your browser to see if a site is secure. The address will start with https if it is secure, make sure to look for the ‘s’ in the address.
- Do a search. Search for the contact information and offer that is being proposed to you. If others have been connected it is likely to be posted online as a scam.
Scams can happen to anyone. If you think that you have been a victim, make sure to call the local police, your bank (if money has been taken) and the FTC to report the scam. This can be devastating, impacting your savings, your identity and compromise your budget so make sure to take steps to prevent this from happening to you.
Adhere to an efficient investment strategy
Investments can be an excellent way to increase wealth. But without proper asset management, all your resources may go down the drain. As a beginner, you may put your money in a trusted brokerage and let them find the best asset classes. They will base it on your risk preference and tolerance. You can also go solo if you prefer to do things your way.
The bond market may be a perfect fit for you as a conservative investor. Although it has lower yields, its volatility is more manageable than the stock market. You must also understand that bonds do not go along well with higher interest rates. Typically, they have an inverse relationship. But since inflation is cooling down, interest rates may follow the trend in the second half of this year. So it may be an excellent time to buy bonds while they are still low.
To be more secure, you can go for treasury inflation-protected securities (TIPS). Tips are also bonds, but they are often government-backed securities. Also, they are more inflation-linked, helping them to hedge risks and valuation losses due to inflation. They have far better yields than the rest of the bonds amidst market volatility.
If you are more of a risk-taker, you can invest in stocks. They have higher risks, but yields are more promising. Also, you can be more secure while trading by choosing dividend-paying stocks. Price corrections may still happen as recession fears persist. As such, you must consider several factors before buying stocks.
You can start by assessing their fundamentals. They will hint at the stocks’ performance and ability to sustain their operating capacity. From there, you can check the whole industry and compare how your preferred company performs relative to its peers. Lastly, assess their stock price, whether undervalued or overvalued.
Protect your wealth with insurance or annuities
Having savings and investments may not be enough. Crises and natural disasters have proven that anyone can deplete their wealth instantly. With that in mind, you may add an extra shield to your assets. Insurance and annuities are both excellent options.
Many reliable financial advisors offer insurance products and annuities. They ensure financial security for retirees by providing them with single or perpetual payouts. You only have to pay premiums to avail yourself of one and maintain your funds in your account.
For better understanding, insurance is a payout distributed upon the death of the policyholder. Meanwhile, annuities are a constant or single payout distributed as long as the policyholder lives.
Delay social security benefits
The current legal retirement age in the U.S. is 66. After filing your retirement, you can start receiving your social security benefits. However, delaying it is possible and even helpful in generating more social security income.
You may increase your benefits for every year you delay your retirement or benefits up to 70. Therefore, if you wait for about two years, there may be a considerable improvement in your retirement income.
Talk with a financial professional
Retirement planning may be a long and winding process. It may be challenging, so you must prepare for it as early as you can. However, you must familiarize yourself with financial products before getting one. Check your budget priorities before saving. As such, talking with a financial professional can help you in wealth management and maintenance.
Learn More About Retirement Planning
Proper financial planning for retirement has become more crucial than ever for seniors. Market volatility has highlighted that your wealth can disappear in an instant. Therefore, a secure income stream can help you get through your retirement years.
Having strategic investments, insurance, and savings will ensure adequacy. You can achieve your retirement goals with the right knowledge, no matter how complex retirement may be.
Article by Chris Porteous, Due
About the Author
Chris Porteous is a growth marketer, helping freelancers and small businesses become financially independent. Previous to this, Chris worked at prestigious financial institutions including: Goldman Sachs, UBS Securities, Garrison Hill Capital Management and DBRS.
He is a frequent contributor and has been featured in publications, including: Entrepreneur, Forbes, Inc, Zerohedge, Lifehack, and more. Fun fact, his previous company Our Paper Life (that was acquired), built the largest cardboard beach in the world.