Making your wealth last in uncertain times
Rising prices and high interest rates are always challenging, but retirees on a fixed income may need to pay especially close attention to the risks.
With inflation at a 40-year high, you may be spending more on everyday things. Meanwhile, you may have a smaller nest egg. The good news is that understanding these risks may help you be more prepared.
What’s at stake: Inflation and rates
Many Americans saw their expenses increase in 2022 as inflation drove up the cost of living. The Federal Reserve has hiked rates to try to get prices under control, but you may continue to see higher prices through 2023.
Twin concerns: Inflation and interest ratesFootnote 1
The economy has bounced back from both many times.
Animated line chart begins with a coordinate plane swiping up from the bottom of the screen. The y-axis labeled Percent has an interval of -2.5% to 20% in intervals of 2.5%. The x-axis is labeled Year from 1965 to 2020 in intervals of five. Two color categories appear in the key at the top of the chart, with silver representing Inflation, consumer prices for the United States, and gold representing Federal Funds Effective Rate.
The silver line for Inflation quickly advances across the chart, rising and falling in varied peaks and valleys. The line begins at approximately 2.5% in 1965 with a general upward for the next 15 years, with peaks at 6.5% in 1970, 12% in 1975, and 15% in 1979. From there, the line begins a downward trend back to about 2.5% in 1985, before it rises to 6% in 1989. The line gradually declines between 1990 and 2020, rising and falling mostly between 0% and 4.5% and finishing at about 5.2% in 2020.
The gold line for Federal Funds Effective Rate darts across frame, generally following the same trend as Inflation. The line begins slightly higher than Inflation at approximately 4.5% in 1965, rising at higher peaks at 9% in 1970, 12.5% in 1975, and 20% a little after 1980. From there, the line falls sharply, as it did for Inflation between 1982 and 1985 to about 6% in 1985 compared to 2.5% for Inflation at the same point. The line rises slightly to 10% in 1988, before mostly declining from there between 0% and 7% and finishing slightly lower than Inflation at 4.5% in 2020.
The interest rate policies meant to calm inflation may affect other areas of your finances, too. Rate hikes make it more expensive to borrow money, which can influence investments in different ways. For instance, bonds may provide higher yields. Still, you may need to be more mindful of both your expenses and your withdrawal strategy.
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Managing your income in retirement
Start with expenses
Try paying more attention to both the amount and necessity of your expenses. For instance, food is a necessary expense, but the amount you spend isn’t fixed; you may be able to save money by eating out less. Health care, on the other hand, is a necessary expense where costs tend to be fixed or increasing.
Average annual health care costs* increase with ageFootnote 2
Animated vertical bar chart begins by first showing two rows of measurements for the x-axis, including Age from 65 to 85 in intervals of five and, below that, the corresponding Year from 2019 to 2039 in intervals of five. Next we see health care costs coming into view that define the y-axis, ranging from $10K to $40K in intervals of $10K.
The bars for each Age and Year begin to rise one by one from the base of the chart, creating a gradual upward slope over time. At 65 in 2019, health care costs are at $12,286. From there, we have $16,155 at 70 in 2024, $21,164 at 75 in 2029, $27,060 at 80 in 2034, and $34,268 at 85 in 2039.
A footnote to the term “health care costs” in the chart title is as follows: “Estimated annual Medicare, supplemental insurance, and out of pocket expenses.”
* Estimated annual Medicare, supplemental insurance, and out-of-pocket expenses
Categorize your spending into necessary and discretionary, leaving room for unexpected expenses like a home repair. When it comes to discretionary spending, you can prioritize those expenses against income considerations.
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Expenses and income needs in retirement
Find new opportunities
Rising rates impact investments differently. While the stock market fell in 2022, bond yields rose alongside rates. Retirees may be able to use fixed income investments strategically to help preserve their portfolio during uncertainty.
Yields rise with ratesFootnote 3
Investing in short-term treasuries may provide yield to help offset inflation.
Animated line chart begins with a coordinate plane that expands to reveal a left and right y-axis connected by an x-axis across the bottom. The left y-axis is labeled annual percentage bond yield with a scale of one to give in intervals of one. The right y-axis is labeled annual percentage savings yield with a scale of 0.1 to 0.8 in intervals of 0.1. The x-axis is labeled 2022 and has intervals that represent each month of the year, beginning with January on the left and ending with December on the right.
The first of three categories represented in the key comes into view with gold defined as US Generic Government 12 Month. A gold line dashes across the graph, following a consistent upward trend that begins at about 0.6% annual bond yield and 0.15% annual savings yield in January, rising to about 3% annual bond yield and 0.48% annual savings yield in June – July, and finishing at 4.5% annual bond yield and just below 0.7% annual savings yield in December.
The second category in the key appears with silver defined as Bankrate.com US Credit Union Savings 1 Year rate. The silver line begins just above the line for US Generic Government 12 month at 0.8% annual bond yield and 0.17% annual savings yield in January. From there, the line is nearly flat from January to May before rising at a much slower rate to end at 1.6% annual bond yield and 0.3% annual savings yield in December.
The third and final category appears in the key with platinum defined as Bankrate.com US MMA Savings Jumbo National Average. The platinum line begins at the same point as the gold line for US Generic Government 12 month at 0.6% annual bond yield and 0.15% annual savings yield in January. From there, the line follows the same path as the silver line for Bankrate.com US Credit Union Savings, remaining mostly flat from January to May before rising slightly to 0.9% annual bond yield and 0.19% annual bond savings in June.
Bond yields eclipse the interest rates of traditional savings accounts. Some investors may be able to spot these types of opportunities in 2023 and beyond.
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Retirement income threats — how should you respond?
The bottom line on income and expenses
Creating a plan for how you’ll handle inflation and rising rates can help you manage risk. A proactive strategy that addresses increased expenses may work best when paired with a comprehensive income and withdrawal strategy. An advisor can help with both.
Your team of dedicated Wells Fargo specialists is here to help you with a goals-based approach and personalized support.
- Your Wells Fargo Advisors financial advisor assists you in creating a customized investment plan to help you achieve your goals
- Your Wells Fargo Bank premier banker is your primary point of contact for banking resources and can refer you to a Wells Fargo Advisors financial advisor for your investing needs