Investments Down, Inflation Up: Help for Retirees

Dear Carrie,

My husband and I are retired, relying on our investments for income. We've been good savers all our lives, but I can't help but feel anxious given that our stocks, bonds, and real estate investments are all down—on top of dealing with inflation. I know things will likely turn around, but I'm losing sleep over how to cope in the meantime. Any suggestions?

—A Reader

Dear Reader,

I hear you! There's no question that dealing with the double whammy of tanked investments and high inflation is tough. And it can be especially challenging for a retiree. But as you point out, it's likely that things will eventually turn around. Plus—and this is important to remember—there are several steps you can consider taking until the markets recover. Granted, you may have to make adjustments in the meantime, but none of it needs to stand in the way of your highest priorities or longer-term goals.

It's so easy to get emotional when it comes to money. But before you let yourself get too worried or make snap decisions, take a careful look at your real numbers, starting with your current net worth (your assets minus your liabilities) and cash flow (everything that comes in from all sources including Social Security, pension, dividends and interest from your investments, and required minimum distributions (RMDs) from your retirement accounts).

This information can be crucial for understanding exactly how much you can spend each month without putting you in danger of outliving your money. Want an extra layer of confidence? Consider consulting with a trusted financial advisor who can review your numbers and help you determine how much you can safely withdraw from your portfolio each year. For example, if you typically withdraw 4% from your portfolio each year, perhaps you should reduce that percentage for the time being.

Once you know exactly how much you can safely spend, make a budget, being sure to include expenses that only come up infrequently (for example, property taxes). If your expenses exceed your income, you have several options for cutting back. But before you make any changes, think carefully about your priorities. Ideally, the things you care about most can stay largely intact. For some, that might be special outings with family or friends, or perhaps it's your regular round of golf. The specifics don't matter; the point is to try to preserve the things you value most, and maybe let go (at least temporarily) of the things that are less important.

Tactically, the most obvious place to start cutting back is by postponing major outlays for things like a home renovation, a new car, or a major trip. Canceling or postponing big ticket items can clearly have the biggest impact, but don't overlook the power of smaller adjustments—for example, scaling back your streaming services or enjoying your meals out at lunch instead of dinner.

You may also find savings in more mundane areas like insurance coverage. Perhaps you no longer need life insurance if your children are grown, or you may find a comparable but less expensive Medicare Advantage or supplemental plan come open enrollment. As you examine last year's spending, take time to explore all your alternatives.

If you're still coming up short after cutting back your spending, it's time to be strategic. After you've counted in your RMDs, you might want to look to your taxable accounts, focusing on investments you've owned for more than a year to minimize the tax hit. Other tax-smart moves could be using losses to offset gains. And of course, it's always smart to sell any low-quality investments. If you wouldn't buy it today, consider selling it now.

According to the Bureau of Labor Statistics, older workers (ages 65 and above) are expected to be the fastest growing segment of the labor force for the next decade. To my mind, taking on part-time work is a no brainer, especially if you're fortunate enough to be in good health. Not only can a job provide some welcome income, but it can help keep you challenged and engaged—and therefore better able to enjoy your time off-duty.

Market declines can wreak havoc with our emotions. But even though every fiber in your body may be telling you to "sell, sell, sell," try to resist. As you've pointed out, markets do recover. It may take several months or even longer. But selling at a low does nothing more than seal your loss.

Instead, before you make any changes, take a careful, objective look at your portfolio. Once again, a trusted financial advisor can be a valuable guide, helping you assess your current asset allocation (the way you've divided your investments between different asset classes such as stocks, bonds, and cash) and compare it to your ideal mix.

Of course, market swings may have moved you away from that target. Or you may find that your feelings about risk have simply changed, and you'd prefer a more conservative portfolio. Or you may now want to have more cash on hand to protect yourself against future market declines (three to four years is a reasonable goal). These are all smart reasons to make adjustments. Just don't radically change your course without careful consideration.

There's no question that the last year has been an incredibly challenging time for investors—especially for retirees on a fixed income. But if you avoid the temptation to run for the hills, and instead take your time to analyze and make carefully planned changes to your budget and portfolio, you can position yourself to regain lost ground and sleep a little better at night.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.