How to Adjust Fixed Income Spending for Inflation
Your retirement dollars are not keeping up with the cost of living due to high inflation for 40 years. For retirees on fixed incomes, this is a big deal, especially with skyrocketing gas, food, rent and energy costs.
It is unclear how long inflation will remain high. The supply chain is still in disarray and the war in Ukraine continues with no end in sight. The Federal Reserve is starting to raise interest rates in an effort to contain inflation, but the impact won’t be felt right away. Therefore, retirees need to find ways to make their money last longer now and for the foreseeable future. “Everything you need to live on every day costs more,” says Pam Krueger, founder of Wealthramp.com. “Inflation has hovered between 2% and 3% over the past decade [versus 7.9 percent today]. We are in a different period right now. You need to plan for it to stay that way for the next two years.
For many people, the first step in fighting inflation is understanding what their monthly expenses really are. Only then can you create a realistic budget and identify areas to cut spending. This is something that many people fail to do, whether they have a fixed budget or not.
When analyzing your expenses, MJ Nodilo, regional manager and partner in the Phoenix office of EP Wealth Advisor, recommends being specific. Go beyond utilities, rent, mortgage and other household expenses. Think about the number of times you fill up on gas, get takeout and/or go to the coffee shop. Understand what races cost and what you pay for streaming services, mobile and digital apps. Armed with this knowledge, you can better determine whether that commute across town or the streaming service is worth it. These minor compromises don’t seem like a lot, but they add up. “A lot of people don’t know what things cost or where their money is going,” says Nodilo. “Knowing the true cost of living is the most important thing. Then you can make decisions and compromises.
make a budget
A budget is important at every stage of your life. This is especially true if you have a fixed income. A budget will help you see where your money is going and stay on track so you don’t overspend. You want to be as detailed as possible by focusing on developing a monthly budget first. If possible, go back three to six months to get a good idea of your expenses. If you already have a budget in place, review it to make sure it can withstand rising inflation. If your budget fails, you need to identify ways to shore up your cash flow.
Increase cash flow
This can come from reducing expenses or increasing your income. The latter option is very viable, given that unemployment is near a 50-year low and employers are scrambling to find workers. “There are the most job openings in the United States for twenty years,” says Nodilo. “That job that used to cost $10 an hour could cost $15 or $18 an hour now. A part-time job can be mentally healthy, especially for people locked indoors for a few years.
If a job is not an option, identify ways to cut expenses. This may mean reducing the number of times you get takeout, making your own coffee and tea, or taking fewer car trips. Without additional income, you have to reduce your expenses to keep up with inflation.