Retirees Face Decline in Financial Wealth Due to Inflation
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Here's your Money Briefing for Thursday, May 16th. I'm J.R. Whelan for The Wall Street Journal. Inflation ticked down to 3.4 percent last month. And while that's significantly lower than where it was in 2022 and much of 2023, prices are still rising. A new study looks at how that's causing many Americans to draw down their savings.
The study looked at also the impact of inflation on the financial wealth of people who are both in retirement and near retirement and they're forecasting declines in wealth. Which is really problematic for people who are either in retirement or on the cusp of retirement and need to rely on their financial wealth for years to come.
Wall Street Journal reporter Ann Tergesen will join us after the break.
Listen at schwab.com slash washingtonwise.
Inflation has caused retirees, and those still several years away from retiring, to drain their savings at a faster pace than in previous years. Wall Street Journal reporter Ann Tergesen joins me. Ann, inflation has steadily come down from its recent high of more than 9%. Why are people having to take bigger withdrawals?
This was a study done by Boston College, their Center for Retirement Research. The goal there was to look at how retirees have actually managed since 2021. And they did a survey to ask people what their actual savings and withdrawal behavior was in that period. So they were able to track that people said they had increased the withdrawals that they've taken from their accounts in order to better cope with rising prices.
What do those withdrawals numbers actually look like?
You know, these are averages over hundreds of people. It came out to something like 2.5% of the average income. They looked in particular at 2022 and 2023 were the years that they actually got data on.
What does the new study say about inflation’s effect on retirees’ savings?
But what they did was sort of extrapolate that trend over the next two years to try to get a sense for how this might affect the wealth that people hold.
Wow, 2.5%. For a lot of retirees, that's a sizable number.
Yeah, and when you consider that the advice is often to withdraw no more than 4% from your portfolio a year, a 2.5% increase, even though that's based on household income, that could be a significant increase in what people are taking from their retirement accounts.
Have the annual Social Security cost-of-living adjustments based on inflation helped?
Yeah, no question. Those have helped retirees. I mean, Social Security forms a significant portion of retiree income, even for people who are sort of wealthier than average. It tends to comprise a decent chunk of income. So that is adjusted for inflation. However, a lot of retirees these days also still, to the extent that they have defined benefit, old-fashioned pension plans, those often are not adjusted for inflation. So in particular, when people work for private sector companies that offer pensions, those generally are not inflation-adjusted. So for retirees, it's really a mixed bag about the extent to which their income is adjusted for inflation. For workers... Generally, over time, wages keep pace with inflation.
So there is a bit of a lag because workers negotiate their raises annually. It doesn't exactly keep up with inflation in real time, but over the long term, wages tend to keep up with inflation.
How have retirees with fixed-rate mortgages factored into this?
The impact of fixed rate mortgages is kind of interesting, which kind of stands to reason when you think about it. But it's a bit of a silver lining scenario with inflation, which is that households that have fixed rate mortgages kind of benefit from inflation to the extent that they have debt.
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