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Retirees seek shelter as inflation surges
After countless denials by the talking heads on TV and financial pundits, the specter of inflation is becoming increasingly preposterous to deny. Of course, a few will downplay the surging prices of consumer goods and commodities as merely a sign of transitory or temporary inflation- a line that’s become popular with the Federal Reserve.
The bottom line is that retirement generally entails living on a fixed income.
Now, this doesn’t mean a meager or inadequate income but that most American’s rely on income sources that do not significantly increase each year. Income sources such as 401(k)s, IRAs, Social Security, or pension payments. While Social Security does provide periodic Cost of Living Adjustments of COLA, the increases are rather modest. For example, benefit increases tied to the cost of living have not exceeded three percent since 2008. The highest adjustments in the last 40 years came during another period of runaway inflation- the late 1970s and early 80s. In 1979 Social Security recipients received a 9.9% adjustment, in 1980 a 14.3% bump, and 11.2% in 1981.
Then there are payments from retirement savings. Payouts from qualified retirement plans such as IRAs and 401(k)s are neither consistent nor guaranteed. Certainly one can draw a fixed amount each month but the underlying investments rarely earn a consistent rate of return. This sequence of returns risk can lead to retirees exhausting their savings sooner than anticipated.
One doesn’t have to look far to find the pressures on a fixed income and systematic retirement withdrawals. The U.S. Department of Agriculture forecasts food prices will rise 2-3% from 2020. That follows a 3.4% food price increase from 2019-2020. The USDA also reports a number of food manufacturers have issued warnings of further price increases. Then there’s the cost of gasoline and retail goods. All this leaves retirees with two choices- cut expenses or find new sources of cash flow.
Kate Dore writes in CNBC that one can ‘fight inflation with a reverse mortgage. “The consumer price index increased by 0.8% in April from March and surged 4.2% from the previous year, the biggest jump since September 2008. As retirees weigh options to preserve purchasing power, financial experts say adding a reverse mortgage to a retirement plan may offer inflation protection.” Don Graves, president of the Housing Wealth Institute said, “There are more and more people who are looking at this strategically.” Of course, any effective strategy to address inflation in retirement should be proactive. Graves added ““The old adage was to wait until you run out of money and then do a reverse mortgage. That’s absolutely not the way it’s being used right now.”
Many older homeowners who considered taking out a HELOC or home equity line of credit are now feeling the squeeze. Last spring in the early days of the pandemic we reported that J.P. Morgan Chase and Wells Fargo pulled their HELOCs citing market risks. In fact today, many banks have not resumed offering HELOCs reports Mansion Global. Columnist Robyn Friedman writes, “Industry experts expect the three major national banks to eventually begin offering HELOCs again, but the product will be rolled out carefully. “I would expect lenders to slowly start doing HELOCs, but only where they are already in the first-lien position,” said Tendayi Kapfidze, chief economist at LendingTree. “Then, if somebody defaults, the risk of loss is pretty low.”
As the value of the dollar declines and supply-chain interruptions continue inflation of consumer goods will continue. The question is where else can one turn to buffer their monthly cash flow without having to service monthly debt payments? Outside of an inheritance or winning the lottery a reverse mortgage appears to be the only logical answer.
