Inflation continues to ease after peaking near 9% in 2022, but a new study from the Center for Retirement Research at Boston College paints a picture of missed opportunities and questionable choices by older Americans navigating rising prices. At this point, the study reads like a tale of “woulda, coulda, shoulda,” but it holds important lessons for advisors the next time inflation rears its ugly head.
Researchers Jean-Pierre Aubry and Laura D. Quinby reported that near retirees and retirees in many cases chose to maintain their consumption levels by reducing contributions to savings and increasing withdrawals.
“Both groups really made sure that they maintained their consumption in the short run at the expense of their longer-run security,” said Quinby, a senior research economist, in an interview. “For those who are really going to have to rely only on their retirement savings to achieve a secure environment, it simply means that they’re going to have to cut spending down the road.”
Double-digit Wealth Losses
The study, a follow-up on one that explored how inflation harms older households, analyzes how those households reacted to inflation from 2021 to 2023, including at what age they retired, how they saved, and how they allocated their investment assets. The researchers used a November 2023 survey by Greenwald Research that included 322 near retirees ages 55 to 62 and 630 retirees 62 and older.
As expected, high inflation hits retirees the hardest. For instance, among middle-income households, near retirees are projected to lose 11.9% of financial wealth in a soft-landing economic scenario relative to a no-inflation scenario. Retirees are projected to lose 14.2% in the same scenario. Projections for other wealth groups in other economic scenarios all yield a similar result: Retirees are worse off than near retirees in high inflation.
“It really hit home for us just how much more vulnerable retirees were relative to near retirees from an inflation shock,” Quinby said. “We knew that, but when we saw it in the data, I think it was a bit of a surprise. And the reason was simply that retirees had a lot less inflation-protected income, particularly those who rely on a defined benefit pension, which is a fairly large share currently,” she said.
Wealthy Households Fare Better
During high inflation, high-income households fared the best, which Quinby attributed to greater allocation of assets in equities and other high-yield investments. In contrast, less-wealthy households tended to be more invested in cash and bonds, which are particularly impacted during periods of high inflation, she said.
“I could add a caveat here that households with very low resources that are living off of Social Security are actually relatively well protected over their lifetime because Social Security is fully inflation protected,” she added.
The researchers report that 34% of near retirees changed the age at which they retire, but only 4% did so because of inflation. Many of those who planned to retire later because of inflation — on average an expected 4-year delay — did not follow through on their plans, according to the study.
“I found it disheartening, although not surprising,” Quinby said in the interview. “Because working longer really is one of the most powerful tools that households have to achieve a secure retirement. … I hoped that households might turn around and follow through on their plan for a little bit longer and hopefully, maybe recover some of the lost savings that we highlighted in our report.”
Dipping Into Savings
The survey found that 39% of near retirees reported that they changed their savings because of inflation, reducing annual savings contributions by an average of $4,065 in 2023. Additionally, many near retirees and retirees responded to rising prices by dipping into savings. Altogether, 23% of retirees and near retirees increased withdrawals from 2021 to 2023, by an average of $3,620.
“They’ve sacrificed to some extent their future well-being to maintain their current well-being,” Quinby said. “The other thing is, they’re not going to be able to leave as much to their kids as maybe they had hoped.”
She added a caveat. “I’m a little hesitant to paint broad strokes here and say everyone should just tighten their belts … because some households really can’t do that, and they’re just doing the best they can under difficult circumstances,” Quinby said. “But to the extent that a household can do that, I think that would be prudent, especially bearing in mind that this this inflation episode, while really painful, hopefully is starting to abate. If there’s an opportunity to ride it out, a few bad years, that might be worthwhile.”
Few Reallocate Assets
The researchers said that many older households missed an opportunity to reallocate their assets to better-performing investments. Seventy-two percent of near retirees and 64% of retirees reported that their investments grew less than inflation, 11% reported that investments tracked inflation, and only 6% saw real growth, they wrote. But only 35% of all households changed their asset allocation between 2021 and 2023, and the magnitude of the shift was “very small,” they said. To the extent that shifts occurred, households moved away from equities and toward fixed income.
Asked how retirees should draw from their various investments during high inflation, Quinby demurred, saying that individuals should ask their financial advisor.
Asked what those advisors should be doing, she said: “Check in with their clients about their spending patterns during inflation. Find out if there are ways that clients can try to cut spending a little bit rather than just depleting their savings, being mindful that it’s not forever — for a few years. And then also take advantage of products that provide a lifetime income and have some inflation protection in them. Those products might be a good option to consider rather than traditional fixed income.”
In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News.
