How can an unpredictable economy affect your retirement?
Planning for retirement comes with challenges, and an unpredictable economy can make it harder to feel confident about your future financial security.
Economic factors like inflation, stock market volatility, recessions, and rising interest rates can erode your savings or reduce your income in retirement.
The good news? Understanding how these conditions can affect your retirement and taking steps to reduce their impact will help you to be more secure in retirement.
High inflation: protecting your purchasing power
Rising inflation is a common concern for retirees because it can mean that your savings won’t last as long as planned.
If inflation outpaces the growth of your retirement income, it can make it difficult to maintain your standard of living, particularly if you're relying on a fixed income.
To combat inflation, consider investing in inflation-protected assets. One option is to allocate a portion of your savings to Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds that adjust with inflation, ensuring your principal and interest payments keep pace with rising prices.
Another strategy is to invest in a variable annuity with something called an inflation rider.
Unlike fixed annuities, which pay a predetermined amount each month, variable annuities can adjust over time based on the performance of the underlying investments, providing some protection against inflation.
You could also consider maintaining a diversified portfolio. A mix of conservative and growth-oriented investments can help balance the need for income with inflation protection.
Shaky markets: guarding against stock market volatility
Extended periods of falling stock prices, often referred to as bear markets, can be particularly damaging if they occur early in your retirement. The combination of withdrawing funds from your portfolio and experiencing a decline in value deplete your savings faster than expected.
To manage the risk of a bear market, consider creating a bucket strategy. This involves dividing your savings into different buckets based on when you’ll need the money.
For example, you could keep one bucket in safe, liquid assets like cash or short-term bonds for immediate expenses (1–3 years), another bucket in moderately conservative investments for medium-term needs (4–7 years), and a final bucket in more aggressive investments like stocks for long-term growth (8+ years). This way, you can weather short-term market downturns without having to sell stocks at a loss.
Another option is to use guaranteed income products like annuities or a pension to cover your basic living expenses, which can give you peace of mind during volatile markets.
Eliminating or reducing debt before retirement is a way to prevent rising interest rates from burdening your budget.
Recessions: ensuring steady income in downturns
A recession—a significant decline in economic activity across the economy—can hurt your retirement security by causing a decline in your assets, particularly in stocks, real estate, or other investments. Recessions may also lead to higher unemployment, making it difficult for those relying on part-time work in retirement to earn extra income.
To safeguard retirement income during a recession, you might want to diversify your income sources. Instead of relying solely on investment returns, create a balanced strategy that includes multiple streams of income.
This can include Social Security, pension income, and dividend-paying stocks, which can provide regular income even during market downturns. Additionally, an emergency cash fund that covers 6–12 months of expenses will allow you to avoid selling assets at depressed values.
Rising interest rates: managing debt and investment risks
Rising interest rates can be a double-edged sword in retirement. On the one hand, higher rates mean that the cost of borrowing—such as through mortgages or loans—becomes more expensive.If you carry debt into retirement, higher interest payments can eat into your fixed income. On the other hand, rising interest rates can benefit retirees by increasing the return on fixed-income investments, like bonds and CDs.
If you carry outstanding debt, such as a mortgage, consider paying it off or refinancing it to lock in a lower interest rate before rates climb higher. Eliminating or reducing debt before retirement is a way to prevent rising interest rates from burdening your budget.
To take advantage of higher interest rates on investments, consider increasing your allocation to fixed-income securities like bonds, especially short-term bonds, which are less sensitive to rising rates than long-term bonds. Additionally, income-producing assets like dividend-paying stocks or real estate investment trusts (REITs) can offer some relief against inflation while providing reliable income as interest rates rise.
Healthcare costs: planning for unpredictable expenses
As you get older, medical expenses tend to rise, and unexpected health issues can lead to substantial out-of-pocket costs. According to studies, the average couple retiring today could spend hundreds of thousands of dollars on healthcare over their lifetime, and this number doesn’t even account for long-term care costs, which can be very expensive.
To reduce the impact of rising healthcare costs, consider enrolling in Medicare as soon as you’re eligible (age 65). It’s also wise to purchase Medicare Supplement Insurance (Medigap) or Medicare Advantage Plans to help cover costs not included in traditional Medicare.
For long-term care, investigate long-term care insurance or hybrid life insurance policies with long-term care riders. These options can help cover the high cost of extended care services like nursing homes or in-home care, without depleting your retirement savings.
Securing your retirement in an unpredictable economy
While an unpredictable economy can pose challenges to your retirement security, taking steps to prepare, keeping informed and staying flexible will make you better equipped to navigate whatever economic conditions lie ahead in retirement.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
Retirement check refers to the annuity income received in retirement. Guarantees of fixed monthly payments are only associated with TIAA's fixed annuities.
Investment decisions should be made based on the investor's own objectives and circumstances. Advice is obtained using an advice methodology from an independent third-party.
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