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What determines the ability of older households to cope with high inflation

Lourdes Balduque | Instant | Getty Images

High inflation eased slightly in April, which could provide some relief to consumers facing high prices.

For retirees and those nearing retirement, higher-than-normal inflation poses unique challenges.

Most retirees have access to one of the few sources of inflation-adjusted income – Social Security – which is adjusted each year to keep up with rising costs.

This year, Social Security beneficiaries saw their benefits increase by 3.2%.

Social Security’s cost-of-living adjustment could also be 3.2% in 2025 based on the latest government inflation data, estimates Mary Johnson, an independent Social Security and Insurance policy analyst. disease..

That estimate could change by October, when the Social Security Administration announces next year’s cost of living adjustment, or COLA. The average Social Security COLA has been 2.6% over the past 20 years, according to the Senior Citizens League.

Consumer prices rose less than expected in April

Even if Social Security benefits follow price increases, the effects can vary for individuals depending on their personal spending and where they live, noted Laura Quinby, senior research economist at the Center for Retirement Research in Boston. College.

“Every year, most households go ninety percent of the way, which is just incredibly valuable,” Quinby said.

Yet even with inflation-adjusted benefits, retirees have faced higher prices since inflation rose in 2021. And near-retirees have also faced difficulty planning for a new phase of life in a context of increasing cost of living.

This can both reduce their current spending and decrease their wealth accumulation for the future.

New research from the Center for Retirement Research examines exactly how inflation impacts people in these groups — near-retirees under 62 and retirees 62 and older.

Two factors determine their ability to manage inflationary shocks: the ability of their income and investments to keep pace with rising prices, and the amount of their fixed-rate debt, according to the study.

How Inflation Affects Household Wealth

Inflation impacts the assets in an investor’s portfolio.

While bonds and fixed-income assets could see price increases, stocks could do well, provided the economy avoids a recession, according to the CRR study.

Wealthier households tend to fare better amid high inflation because they are more likely to invest in stocks and companies that continue to grow in value.

Retirees tend to get most of their income from Social Security or defined benefit pensions. Although Social Security is adjusted for inflation, pensions generally are not, which is a disadvantage for retirees who rely on it.

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Near-retirees are more likely to rely on income from their jobs. If their salaries do not keep up with inflation, they are more likely to be affected by higher costs.

Wealthier near-retirees may have other sources of income from investments or businesses that grow with inflation. Others may already be receiving pension income.

Households with fixed-rate mortgage debt have an advantage, since their monthly payments remain the same even when inflation increases. Near-retirees tend to benefit, as they are more likely to still have a mortgage than retirees.

How older households respond to inflation

When inflation causes costs to rise, it can negatively impact both immediate consumption and the amount of goods and services a household can purchase, as well as future consumption, Quinby noted.

Many households tend to reduce their savings and increase their withdrawals in an attempt to return to the level they were at before inflation resumed.

“But it comes at a cost, which is that they see it as a big blow to their future wealth,” Quinby said.

Near-retirees who are still working have more flexibility than retirees to adjust to higher inflation because they are likely to see pay increases.

Early retirees who remain in the workforce may be able to make up for lost savings if they can catch up to when wages outpace inflation, Quinby said.

However, only 4% of near-retirees surveyed in the study changed their retirement age in response to inflation, with an expected average delay of four years. Among all near-retirees, 34% changed their retirement date.

Retirees have less flexibility to deal with the effects of high inflation. But where they can, they can take advantage of higher interest rates by reinvesting fixed-income investments that might earn less, the study suggests.

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