The pandemic and health concerns have led some Americans to think about retiring earlier than they previously planned, and market volatility has heightened many pre-retirees’ nervousness about a potential shortfall in their retirement income.
“For pre-retirees, inflation has put a question mark around, ‘What does my retirement look like?’” says Jeff Cimini, senior vice president, retirement product management at New York-based Voya Financial. “We’re hearing from both plan sponsors and participants how important it is to have a plan as a participant approaches retirement, and that participants are asking for assistance from their employer.”
Those additional factors make now an even more complicated time to think about retirement-income planning, Cimini believes. “Pre-pandemic, these things were muted: We had reasonably steady capital markets, and low inflation,” he adds.
Wylie Tollette, San Mateo, California-based executive vice president, client investment solutions at Franklin Templeton, understands why people near retirement are concerned. “Honestly, there’s good reason to be worried, as inflation stays higher for longer than virtually anyone anticipated,” he says. “Now, folks are worried that it will ‘settle down’ at a level higher than they anticipated. Even if long-term inflation runs 1% higher than someone planned for, that extra 1% can really make a difference for a retiree.”
Prioritizing Risks Amid Limited Choices
Seventy-three prevent of Baby Boomers say they’re worried that they might not be able to afford the lifestyle they want in retirement because of the increased cost of living, according to the “2022 2Q Quarterly Market Perceptions Study” from Allianz Life Insurance Company of North America. Sixty percent of respondents from all generations say they think it’s important to have some retirement savings protected from loss.
No matter the timing, those nearing or entering retirement have limited choices if they’re worried that they don’t have enough to fund their retirement. They can try to save more, work longer, or hope to boost their investment returns by taking more market risk–or they can cut their spending in retirement. However, the current economic and market dynamics make all four of these options especially complicated decisions now.
“The people approaching retirement are the ones who have the least amount of time to adjust for these spikes in inflation, and dips in the market,” says Kelly LaVigne, vice president of advanced markets and solutions at Minneapolis-based Allianz Life. “And the first years of your retirement are supposed to be the fun years: They call it the ‘go-go’ years. This is when you start checking off all the items on your bucket list, and spending in retirement is at its highest. That’s why it’s so difficult to have the decline in market returns, in addition to the inflation.”
LaVigne calls the 10-year period running from five years before someone retires to five years after someone retires “the fragile decade,” from a planning perspective. So for people in this timing range, the addition of surging inflation as a factor is a big concern. “Inflation risk is really top of mind, because let’s face it: We haven’t seen numbers like this in 40 years,” he says. “Even if inflation runs at a 3% average, your cost of living would double in 24 years.”
Read more about “Inflation’s Long Shadow” from the Fall issue of NAPA-Net the Magazine at https://issuu.com/usaretirement/docs/_nntm_fall22_complete/32.
